Two Folsom StreetSan Francisco, CA 94105www.gapinc.com

facing challengesfi nding opportunities2 0 0 4 S O C I A L R E S P O N S I B I L I T Y R E P O R T

GA

P IN

C. 2

00

4 S

OC

IAL

RE

SP

ON

SIB

ILIT

Y R

EP

OR

T

On the cover: Women embroidering Old Navy shirts at the Project Swabhiman

social welfare home, Delhi, India, February 2005.

Founded in 2003 with support from Gap Inc., Project Swabhiman is a joint effort

with the Delhi government’s Social Welfare Department and two local

non-governmental organizations, Navjyoti and Partners in Change, to help

women who have been victims of domestic violence.

The program offers participants shelter, support services and job training,

and provides them with a clean and safe work environment in which the

intricate garment handwork the region is known for can be produced under

ethical conditions.

The name “Swabhiman” was chosen by the women participating in the project.

It is Hindi for “self-respect, self-pride and dignity.”

“ Project Swabhiman has helped me through personal

difficulty. I learned a new skill—handwork which will

be beneficial for me in the future—and I am earning

money and have a bank account which helps me in

saving money.” Anita, 20 years old

Gap Inc. 2004 Social Responsibility Report

2 FROM PAUL PRESSLER

4 FISCAL YEAR 2004 IN REVIEW

6 REGIONAL BREAKDOWN OF SOURCING COUNTRIES AND SIGNIFICANT GAP INC. SOCIAL RESPONSIBILITY INITIATIVES

8 FORGING SUSTAINABLE SOLUTIONS 12 Goals 14 The Art of Factory Monitoring 28 Integrating Labor Standards into Our Business Practices 34 Progress Through Partnerships

42 EMPLOYEES

46 COMMUNITY INVOLVEMENT

48 ENVIRONMENT, HEALTH AND SAFETY

52 STATEMENT FROM THE PUBLIC REPORTING WORKING GROUP

53 GRI INDEX / U.N. GLOBAL COMPACT INDEX

56 GLOSSARY

2 FROM PAUL PRESSLER

We’ve taken

important

steps toward

safer conditions

and better

treatment for

workers

in garment

factories, but

the social

responsibility

issues across

the industry

remain

immensely

complex.

From Paul Pressler President and Chief Executive Officer, Gap Inc.

In the days after we released our first social respon-

sibility report last year, it wasn’t easy to see headlines

like, “Gap admits factory abuses.”

But this was more than offset by positive responses

from the media, employees and other stakeholders

who told us how much they appreciated our candor

– and how they wanted to work with us to address the

challenges described in the report.

Their response renewed our commitment to improv-

ing garment factory conditions, and reinforced our

belief that talking about challenges is an important

step toward resolving them.

Of course, we know that driving change of this mag-

nitude isn’t easy. We’ve taken important steps toward

safer conditions and better treatment for workers in

garment factories, but the social responsibility issues

across the industry remain immensely complex.

I’m optimistic, however, that progress in our industry

over the next decade will be more profound than any-

thing we’ve seen, including improved labor standards,

factory conditions and business practices – because

ethical sourcing represents a better way of doing

business in a global economy.

That doesn’t mean we expect our efforts to create

a competitive advantage. While ethical sourcing is an

essential part of the long-term growth and sustain-

ability of our business, our goal is to help improve

conditions across the apparel industry as a whole.

And we know that’s not something we can do alone.

Over the past year, we’ve learned the power of

collective engagement, and of open, honest discussion

about the issues that we and many other companies

face. As such, we have been expanding our participa-

tion in collaborative efforts.

3Gap Inc. 2004 Social Responsibility Report FROM PAUL PRESSLER

In Cambodia, for example, we continue to support

the International Labor Organization’s (ILO) factory

monitoring and training efforts, which, according to a

World Bank survey, are helping the country compete

more effectively in the international apparel market.

And we recently partnered with the International

Finance Corporation’s Mekong Private Sector Develop-

ment Facility (IFC/MPDF) to launch a new managerial

skills training program for factory supervisors.

The elimination of trade quotas represents an historic

shift in our industry, changing how apparel retailers

source their products. This creates new challenges,

but it also creates new opportunities to build strategic

relationships with garment manufacturers who share

our commitment and values.

In 2004, I visited one such garment manufacturer in

India. His factories provide workers with childcare

facilities, free eye care and access to medical services.

And he has incorporated sound environmental prac-

tices, like rainwater harvesting, into his operations.

He sees that social responsibility is good business,

and, as a result of his efforts, his turnover rates are

low and his productivity is high.

We know that, unfortunately, this example isn’t the

norm. So we remain committed to working with gar-

ment manufacturers to help them improve.

For instance, we are partnering with the China

Association of Enterprises with Foreign Investment

(CAEFI) and several leading companies to form the

Better Workplace Foundation in China. This group

maintains an ongoing discussion about labor laws

with the Chinese government, and will help factory

owners understand how better labor standards can

make their businesses stronger.

Examples like this are encouraging and reinforce

that making progress requires going beyond what’s

expected. That’s why we’re continuing to push the

boundaries of what’s possible, piloting new programs

and learning along the way.

These same principles of exploring, collaborating

and continuous learning shape our efforts across the

company and have become part of our culture.

Most important, we know that our success depends

on our ability to engage and inspire our more than

150,000 employees. We are committed to listening to

their needs, providing an inclusive environment and

investing in their training and development so they

can build rewarding careers with us.

Community giving is also deeply embedded in our

company’s values. In 2004, our employees spent

approximately 73,000 hours volunteering in their

communities. To encourage their involvement, we

provide time off work to volunteer, as well as mon-

etary donations to the organizations they support.

Following the tsunami in South Asia, we reached out

to support garment workers and their communities

in the region. Gap Foundation double-matched em-

ployee contributions and donated additional funds to

contribute $2.3 million to relief efforts. I just met with

our team which has been on the ground in Sri Lanka

and India ensuring that these funds go to the areas

where they’ll do the most good over the long-term.

We’re constantly finding new ways to reduce our

impact on the global environment through improve-

ments in how we source, distribute and sell our

products. Old Navy, for example, recently redesigned

its hangers to make them easier to recycle and will

introduce a new recycling program later this year.

And last year, we piloted a new water quality program

for denim laundries.

This report highlights the progress we’re making in

several important areas. At the same time, it under-

scores the challenges we’re facing and some of the

opportunities we’re finding to improve the way we do

business and collaborate on projects that can become

models for lasting change in our industry.

Thank you for taking the time to learn more about our

efforts. We look forward to sharing more information

in the years to come.

4 FISCAL YEAR 2004 IN REVIEW

COMPANY PROFILEGap Inc. is a leading international specialty retailer offering clothing, accessories and personal care products

for men, women, children and babies under the Gap, Banana Republic and Old Navy brands, with a fourth

brand, Forth & Towne, launching in 2005. Founded in 1969 by Doris and Don Fisher in San Francisco, California,

Gap Inc. has grown from a single store with a handful of employees to approximately 3,000 stores in the United

States, United Kingdom, Canada, France and Japan, with more than 150,000 employees. In the United States,

customers may also shop the company’s online stores.

A public company, Gap Inc. is traded on the New York Stock Exchange and is listed on the Calvert Social Index,

Domini 400 Social Index, Dow Jones Sustainability Index, and the FTSE4Good US 100 and FTSE4Good Global Indices.

Below, we provide a summary of our financial results and an overview of our accomplishments and goals in key

areas of social responsibility.

FINANCIAL PERFORMANCEIn 2004, Gap Inc. continued to focus on offering trend-right product and delivering it through engaging, easy-

to-shop environments. We saw an 11 percent increase in earnings, and our commitment to strong financial

management helped restore the company’s corporate credit and debt ratings to investment-grade this year.

2003 2004

Net sales $15.85 billion $16.27 billion

Net earnings $1.0 billion $1.1 billion

Net earnings per share $1.09 $1.20

FORGING SUSTAINABLE SOLUTIONS IN OUR SUPPLY CHAIN (PAGES 8 – 41)Last year, we continued to take a multi-pronged approach to improving labor standards in our supply chain. In

addition to inviting Social Accountability International (SAI) and Verité to evaluate our factory monitoring pro-

gram, we explored ways to further integrate labor standards directly into our supply chain operations, expanded

our stakeholder outreach and increased our participation in multi-stakeholder initiatives.

2003 2004

Factories inspected1 94% 99.9%

Factories rejected 16% 15%

Number of factory revocations due to non-compliance with Code of Vendor Conduct 136 70

Going forward, we will focus on a four-part strategy to improve working conditions: monitor factories, integrate

labor standards into our business practices, collaborate with partners to drive systemic, industry-wide change,

and communicate openly about our goals, successes and challenges. Areas of particular importance include

evolving toward more thorough inspections and sustainable solutions that address root causes, building greater

vendor ownership of compliance, and working toward consistency within the industry through greater

collaboration and standardization.

1 Garment factories that were approved for production for all of fiscal year 2003 and all of fiscal year 2004, respectively.

Fiscal Year 2004 In Review

FISCAL YEAR 2004 IN REVIEW 5

EMPLOYEES (PAGES 42 – 45)We are dedicated to making Gap Inc. a place where people can build their careers. In 2004, our Executive Lead-

ership Team introduced a new cultural framework anchored in our core values. We also launched a mandatory

ethics course and rolled out a new program designed to help employees maximize the benefits we offer. In the

coming year, we will focus on further enhancing our diversity programs and exploring new ways to retain and

develop our full-time and part-time employees.

COMMUNITY INVOLVEMENT (PAGES 46 – 47)Gap Foundation helped drive record levels of employee volunteerism last year. With an emphasis on programs

that serve children, youth and families, we provided millions of dollars in cash grants and in-kind donations to

organizations in the communities where we work, live and source our products. After the December 2004 South

Asia tsunami, we double-matched employee contributions and pledged $2.3 million for relief efforts.

2003 2004

Value of cash donations $6 million $8 million

Value of in-kind donations $12 million $25 million

Employee volunteer hours 21,965 72,937

One of our biggest opportunities to increase the impact we have on communities is energizing volunteers at the

retail store level. We are piloting a localized volunteer and grantmaking effort in our Denver-area stores and

hope to apply learnings from this experience to other regions.

ENVIRONMENT, HEALTH AND SAFETY (PAGES 48 – 51) In 2004, we were pleased to see reductions in average store energy consumption and rates of employee injury.

We conducted our first high-level environmental assessment to identify the environmental impacts of our

operations, which clarified the need to focus on four key areas: packaging, energy consumption, waste and

recycling, and water quality.

2003 2004

Average store energy consumption 32.35 kWh/ft2 per year 31.56 kWh/ft2 per year

Employee rate of injury per 200,000 hours worked 4.86 4.43

This year, our Risk Management and Product Integrity teams will continue their efforts to enhance the safety of

our work environments and products, while our environmental efforts will concentrate on the four areas

identified in the assessment we conducted last year. As a participant in the U.S. EPA’s Climate Leaders program, we

are also committed to driving further reductions in our greenhouse gas emissions.

5Gap Inc. 2004 Social Responsibility ReportGap Inc. 2004 Social Responsibility Report

6 GAP INC. SOURCING AND INITIATIVES

1 Gap Inc. has programs to attract, develop, reward and engage employees everywhere we do business, including the major hubs of operations indicated on this map.

COSTA RICA• San Jose: Continuous Improvement in the Central

American Workplace (CIMCAW)

DOMINICAN REPUBLIC• Santo Domingo: CIMCAW

EGYPT• Cairo: Water quality pilot program• Port Said: Water quality pilot program

EL SALVADOR• San Salvador: Independent Monitoring by Grupo de

Monitoreo Independiente de El Salvador (GMIES) • San Salvador: CIMCAW

GUATEMALA• Guatemala City: Independent Monitoring by the

Commission for the Verifi cation of Corporate Codes of Conduct (COVERCO)

• Guatemala City: Continuous Improvement in the Guatemalan Workplace (CIMGUAW)

• Guatemala City: Water quality pilot program

HONDURAS• San Pedro Sula: Community Corps volunteers• San Pedro Sula: Gap Foundation grants and donations• San Pedro Sula: Independent Monitoring by the

Independent Monitoring Team of Honduras (EMIH) • Tegucigalpa: CIMCAW

GLOBAL• Business Coalition for Capacity Building (BCCB)• Business Leaders Initiative on Human Rights (BLIHR)• MFA Forum• United Nations Global Compact• Gap Inc. employee programs1

BANGLADESH• Dhaka: Water quality pilot program • Dhaka: ILO training program on better working conditions

CAMBODIA• Phnom Penh: Water quality pilot program • Supervisory Skills Capacity Building (SSCB) program• Sewing a Healthy Future partnership with CARE

CANADA• Brampton, ON: Corporate employee volunteerism• Brampton, ON: Gap Foundation grants and

donations• Brampton, ON: Local offi ce environmental programs

CHINA• Dongguan: Water quality pilot program• Guangzhou: Impactt/HKPC productivity program • Hong Kong: Corporate employee volunteerism• Hong Kong: Gap Foundation grants and donations• Hong Kong: Local offi ce environmental programs• Shanghai: Impactt/HKPC productivity program• Tianjin: Water quality pilot program• Worker trainings on labor law conducted by Mingyu Chen

COSTA RICA

DOMINICAN REPUBLIC

EL SALVADOR

GUATEMALA

HONDURAS

MEXICO

NICARAGUA

MEXICO, CENTRAL AMERICA & THE CARIBBEAN

UNITED STATES & CANADA

SOUTH AMERICA

BRAZIL

COLOMBIA

PERU

UNITED STATES CANADA

NORTH AFRICA/MIDDLE EAST

BAHRAIN

OMAN

QATAR

UNITED ARAB EMIRATES

PERSIAN GULF

KENYA

LESOTHO

MADAGASCAR

MAURITIUS

SOUTH AFRICA

EGYPT

ISRAEL

JORDAN

MOROCCO

TUNISIA

BULGARIA

MOLDOVA

ROMANIA

RUSSIA

TURKEY

CATEGORIES

• Ethical Sourcing

• Employees

• Community Involvement

• Environment

SUB-SAHARAN AFRICA

REGIONAL BREAKDOWN OF SOURCING COUNTRIES AND SIGNIFICANT GAP INC. SOCIAL RESPONSIBILITY INITIATIVES

EUROPE (INCLUDING RUSSIA)

BELGIUM

ITALY

SPAIN

UNITED KINGDOM

7Gap Inc. 2004 Social Responsibility Report GAP INC. SOURCING AND INITIATIVES

SOUTHEAST ASIAINDIAN SUB-CONTINENT

GREATER CHINA

CHINA

HONG KONG

MACAU

SAIPAN/N. MARIANAS (U.S.)

TAIWAN (R.O.C.)

BANGLADESH

INDIA

NEPAL

PAKISTAN

SRI LANKA

BRUNEI DARUSSALAM

CAMBODIA

INDONESIA

MALAYSIA

PHILIPPINES

SINGAPORE

THAILAND

VIETNAM

NORTH ASIA

SOUTH KOREA

INDIA• Bangalore: Rainwater harvesting program • Bangalore: Water quality pilot program • Chennai: Water quality pilot program• Delhi: ETI working group on homeworkers• Delhi: National Productivity Council of India

productivity program• Delhi: Project Swabhiman• Gap Foundation grants for tsunami relief

INDONESIA• Sukoharjo: Water quality pilot program• West Java: Water quality pilot program• Gap Foundation grants for tsunami relief

LESOTHO• Maseru: Partnership with CARE on HIV/AIDS• Maseru: Global Training Partnership (GTP) • Maseru: Water quality pilot program

MEXICO• Gomez Palacio: Water quality pilot program• Irapuato: Water quality pilot program• Puebla: Community Corps volunteers• Puebla: Gap Foundation grants and donations

NICARAGUA• Managua: CIMCAW

PHILIPPINES• Muntinlupa: Water quality pilot program• Valenzuela: Water quality pilot program

SRI LANKA• Gap Foundation grants for tsunami relief

THAILAND• Bangkok: Global Compliance Annual Conference training

TURKEY• Istanbul: Bi-Coastals management systems training • Istanbul: Corporate employee volunteerism• Istanbul: Gap Foundation grants and donations• Joint Initiative on Corporate Accountability and Workers’

Rights

UNITED KINGDOM• London: Ethical Trading Initiative (ETI)• London: ETI working groups on purchasing practices and

homeworkers• London: November 2004 multi-stakeholder meeting • London: Corporate employee volunteerism• London: Gap Foundation grants and donations• Rugby: Corporate employee volunteerism• Rugby: Gap Foundation grants and donations

UNITED STATES• Community involvement in the U.S. includes employee

volunteerism and Gap Foundation grants and donations• Environmental programs at corporate campuses• Public Reporting Working Group • Albuquerque, NM: Community Corps volunteers• Denver, CO: Colorado in Action• Denver, CO: Gap Foundation grants and donations• San Francisco, CA: BSR Apparel Water Quality Working

Group• New York, NY: Social Accountability International (SAI)• Washington, D.C.: September 2004 multi-stakeholder

meeting

EUROPE (INCLUDING RUSSIA)

8 FORGING SUSTAINABLE SOLUTIONS INTRODUCTION

forging sustainable solutions

The magnitude and complexity

of the challenges we face

are not an excuse for inaction.

We recognize and embrace our

responsibility to take a leadership

role in improving conditions

in the world’s garment factories.

Today, factory monitoring remains a vital part of our

strategy to improve working conditions in the garment

industry. Our Vendor Compliance Officers (VCOs) visited

99.9 percent of the factories that we approved for pro-

duction for all 12 months of fiscal year 2004. And they

partnered with factory management to improve oper-

ating practices and take corrective action on thou-

sands of violations of our published labor standards.

Over time, though, we’ve come to realize that monitor-

ing is not enough. Factory inspections make it possible

for us to identify problems and measure progress

against goals. But ultimately, driving lasting, mean-

ingful change across the industry as a whole requires

a broader, more integrated approach.

As we prepared this report, we had a chance to reflect

on how much has changed since we started working

to improve garment factory conditions more than a

decade ago.

For most of the 1990s, we concentrated on policing

our manufacturers. We developed our own set of

detailed labor standards and created an internal team

to enforce them.

Our Approach to Creating Lasting Change

Photo:Executive Vice President, Chief Compliance Officer and General Counsel, Lauri Shanahan, with Vice Presi-dent, Social Responsibility, Dan Henkle.

9Gap Inc. 2004 Social Responsibility Report INTRODUCTION FORGING SUSTAINABLE SOLUTIONS

In part, that’s because our industry is so large and

fragmented. As big as we are, we account for just

a small fraction of garment production worldwide.

We don’t send teams to monitor the many factories

where we don’t have production. And even in factories

where we do have orders, enforcing our Code of Ven-

dor Conduct (COVC) can be difficult. In most cases, we

are just one of several customers, and it’s often fairly

easy for garment manufacturers to replace us if we

revoke approval and walk away.

ROOT CAUSES OF POOR WORKING CONDITIONSThe bigger problem, though, is that the root causes of

poor working conditions are so varied and complex.

As the table below illustrates, problems with labor

standards can result from a wide range of factors

that are hard to isolate and address.

Even the most conscientious garment manufacturers

can inadvertently contribute to problems through

weak management skills, outdated operations or a

tendency to take on too much work. Buyers like us

can have a negative impact on working conditions

through inefficient purchasing practices or unreason-

able demands. And underlying everything are

systemic problems – like economic underdevelop-

ment and a lack of law enforcement – that put

constant pressure on wages and chronically under-

mine efforts to protect the rights of workers.

FORGING SUSTAINABLE SOLUTIONSThe magnitude and complexity of the challenges we

face are not an excuse for inaction. As we emphasized

in last year’s report, we recognize and embrace our

responsibility to take a leadership role in improving

conditions in the world’s garment factories. The

realities of our industry and broader operating environ-

ment, however, do have important implications for

the strategies we use to drive change.

Over the past few years, we have been migrating

toward a more collaborative, integrated approach in

which we work closely with partners in government,

civil society, trade unions and the commercial sector

to develop broad solutions that address the underly-

ing causes of poor working conditions and stand the

test of time.

Our strategy for forging sustainable solutions focuses

on four key priorities:

Inspect & MeasureWe are leveraging both our experience and the

expertise of external parties to make our monitoring

program a more effective tool for identifying problems

and measuring progress. We want to be able to bring

the same rigor and consistency to factory monitoring

that we apply to other aspects of our business, like

tracking inventory flow or recording financial results.

FACTORS CONTRIBUTING TO POOR WORKING CONDITIONS IN GARMENT FACTORIES

GARMENT MANUFACTURERS• Poor supervisory and

management skills• Acceptance of orders

without assessing requisite capacity and capabilities

• Lack of modern tech-nology and equipment

• Inefficient processes and operating practices

• Insufficient under-standing of labor laws and standards

• Lack of regard for the rights of workers

BUYERS (BRANDS AND RETAILERS)• Unreasonable expecta-

tions regarding speed and cost

• Lack of understanding of factory conditions and how business deci-sions impact them

• Inefficient purchasing practices

• Insufficient emphasis on labor standards in sourcing decisions

• Inconsistent labor standards and means of enforcement among companies

INDUSTRY CONDITIONS

• Fragmented nature of garment industry

• Intense competition and focus on reducing costs

• Lack of uniform code and industry coordina-tion and resolve

• Chronic price deflation

COUNTRY CONDITIONS • Inadequate or outdated

labor laws• Insufficient enforce-

ment by local govern-ment

• Lack of understand-ing of rights among workers

• Poor economic, financial and civic infrastructure

INTERNATIONAL CONDITIONS• Global trading require-

ments, including complex bi- and multi-lateral restrictions

• Tariffs• Geographic shifts in

production following expiration of quotas

• Increasing expecta-tions of consumers regarding cost and selection

WORKING CONDITIONS

10 FORGING SUSTAINABLE SOLUTIONS INTRODUCTION

Last year, we took an important step toward that

goal when Social Accountability International (SAI)

and Verité conducted thorough assessments of our

monitoring program and inspection protocols. We’re

already good at catching most violations. But their

insights are helping us dive beneath the surface to

identify serious problems that are harder to detect

– like discrimination, harassment, abuse and viola-

tions of the right to freedom of association. Better

monitoring data will give us a more accurate picture

of working conditions, which, over time, will help

us make more informed sourcing decisions, provide

better guidance to our manufacturers and track

improvement more effectively.

IntegrateWe are hoping to facilitate better compliance by

improving supply chain operations and embedding

labor standards directly into our business practices.

Ultimately, we believe garment manufacturers, most

of whom are multi-national corporations in their own

right, must take ownership of and responsibility for

conditions in the factories they own and operate. To

encourage them to take that responsibility seriously,

we’re developing a formal tool that will enable us to

factor in a garment manufacturer’s compliance

record – along with criteria like cost, speed, quality

and innovation – when deciding where to place orders.

At the same time, we recognize that our business

practices can have an impact on compliance, and we

are actively exploring better ways to work with our

manufacturers. To avoid contributing to excessive

overtime, we’re making a greater effort to ensure

that garment manufacturers have accurately

assessed their capacity and capabilities before we

place orders with them. We are working to reduce

inefficient purchasing practices such as rush orders

and last minute changes. And we are continuing to

partner with garment manufacturers to help them

increase productivity and improve compliance

through better processes and more sophisticated

management techniques.

Collaborate We continue to partner with stakeholders from all

sectors to address the systemic problems that

contribute to poor working conditions in our industry.

Over the past few years, we've worked closely

with governments, NGOs, trade unions, other brands

and retailers, and garment manufacturers on

dozens of pilot programs in areas ranging from

worker education and independent monitoring to

management training and productivity enhancement.

Going forward, we will continue to participate in

localized pilots that target specific issues. We will

also begin placing more emphasis on leveraging

lessons and relationships from these programs to

support large-scale initiatives that help create the

legal, economic, civic and regulatory frameworks

necessary for sustainable change across our

sourcing markets and the industry as a whole.

Three of our most important priorities include:

encouraging the development and implementation of

a uniform code of conduct and consistent standards of

enforcement; supporting public policy that promotes

economic development and the enforcement of labor

laws; and helping to mitigate the impact of post-

quota consolidation.

FORGING SUSTAINABLE SOLUTIONS

• Inspect & Measure: Make monitoring a more

effective tool for identifying problems, managing

remediation and measuring progress

• Integrate: Embed compliance directly into

business practices and supply chain operations

• Collaborate: Work with external stakeholders

to address systemic issues that have made poor

working conditions endemic in the garment

industry

• Communicate: Build a foundation for ongoing

growth and collaboration through transparency

and stakeholder engagement

11Gap Inc. 2004 Social Responsibility Report INTRODUCTION FORGING SUSTAINABLE SOLUTIONS

CommunicateWe are concentrating on building a strong foundation

for continued growth and collaboration through

greater transparency around our business practices,

our goals and the challenges we face.

To quote U.S. Supreme Court Justice Louis Brandeis,

we believe that a “bright light is the best disinfectant.”

The more open and honest we can be about conditions

and challenges, the more helpful we can be in

addressing them.

This report and the one we released last year are

reflections of that belief. But we know it is essential to

communicate and learn on a continuous basis.

You’ll see examples of this commitment throughout

the pages that follow. On page 52, for instance,

members of the Public Reporting Working Group, who

encouraged us to release last year’s report, share

some of their thoughts on this report. On page 36, we

discuss learnings from stakeholder outreach sessions

we conducted last year in Washington, D.C. and

London. And on page 37, we describe some of the

work we are doing with the Global Reporting Initiative

(GRI) to develop consistent reporting standards that

will make it possible to compare performance across

companies and over time.

THE ROAD AHEADAs signatories to the United Nations Global Compact,

we are commited to ensuring that all aspects of

our business are conducted with respect for human

rights. The more we work to improve labor conditions,

the further we realize we have to go. But by improving

our ability to identify violations, embedding labor

standards directly into our business practices and

partnering effectively with stakeholders to address

systemic problems, we believe we can help drive

lasting change not only in our approved factories but

across the entire garment industry.

The table on the next page provides a summary of our

progress over the past year. On the opposite page, we

outline our key goals through 2006.

We’ll be holding ourselves accountable for these goals

as we move forward. We invite you to do the same

by sharing your questions and comments with us

through our corporate web site at www.gapinc.com.

Dan Henkle, Vice President, Social Responsibility

Lauri M. Shanahan, Executive Vice President,

Chief Compliance Officer and General Counsel

12 FORGING SUSTAINABLE SOLUTIONS GOALS

AREA OF FOCUS GOAL PROGRESS SELF-ASSESSMENT

Inspect & Measure Participate in SAI pilot compliance program evaluation

• Participated in evaluation by Social Accountability Interna-tional (SAI) (p.26)

• Participated in Verité assessment of training needs (p. 27)

Achieved

Integrate Identify supply chain practices that may impact factory working conditions

• Identified inefficient purchasing practices and launched pilot programs to drive improvement (p. 32)

• Began developing sourcing scorecard that integrates compliance data into sourcing decisions (p. 30)

• Began developing a production scorecard for garment manufacturers to evaluate and provide feedback on our business practices (p. 33)

• Held Vendor Summit to begin building closer relationships and set expectations among top garment manufacturers (p. 29)

• Expanded efforts to help our garment manufacturers improve management and operating practices (p. 31)

Achieved

Collaborate Support multi- stakeholder efforts to develop uniform code of conduct

• Began efforts to reconcile Gap Inc.’s Code of Vendor Conduct (COVC) with Ethical Trading Initiative (ETI) and SAI standards (p. 38)

• Participated in multi-brand group to align practices in India

• Participated in Joint Initiative on Corporate Accountability and Workers’ Rights (p. 38)

In progress

Broaden worldwide stakeholder engage-ment and initiatives

• Participated in several key multi-stakeholder initiatives (MSIs), including ETI, the Business Leaders Initiative on Human Rights (BLIHR) and the MFA Forum (p. 37)

• Continued collaborative efforts with the International Labor Organization (ILO) and other organizations in Cambodia, including a new program with the Mekong Private Sector Development Facility to train factory supervisors (p. 41)

• Helped launch two capacity-building and social dialogue programs in Central America – Continuous Improvement in the Guatemalan Workplace (CIMGUAW) and Continuous Improvement in the Central American Workplace (CIMCAW) (p. 40)

• Continued participation in the Business Coalition for Capacity Building (BCCB) (p. 40)

• Invited AccountAbility to conduct training for compliance management team to develop better stakeholder engage-ment skills based on the AA1000S standard

Achieved

Communicate Not stated in last year’s report

• Published first social responsibility report

• Hosted stakeholder outreach sessions in the U.S. and U.K. (p. 36)

• Increased participation in forums related to social responsibility and factory conditions

• Continued ongoing dialogue with individual stakeholders to share learnings, identify issues and develop strategies

Achieved

2004 GOALS

13Gap Inc. 2004 Social Responsibility Report GOALS FORGING SUSTAINABLE SOLUTIONS

AREA OF FOCUS GOAL ACTION PLAN

Inspect & Measure Review COVC to address deficien-cies and increase alignment with other codes

• Conduct a comparative analysis with the SA8000 standard and ETI Base Code

• Outline plan to address major inconsistencies

Review monitoring protocol for more efficient and effective use of compliance resources

• Evaluate scope, duration, staffing levels and frequency of factory audits in context of feedback from SAI and Verité

• Evaluate opportunities to streamline monitoring efforts through greater collaboration with other buyers and third-party auditors

Develop a new data collection system

• Develop system that substantially improves ability to record, analyze and report data in meaningful ways

Further enhance external auditor training for compliance team

• Identify externally-recognized training organizations

• Conduct additional issue-specific training on detection of issues such as discrimination and freedom of association

Integrate Integrate compliance performance metrics into sourcing scorecard

• Work with sourcing to include compliance performance as a factor in overall factory ratings

Develop formal internal training to address purchasing practices issues

• Conduct business simulation training that highlights the impact of purchasing decisions on compliance, quality and cost

Explore options for a more system-atic training program for garment manufacturers and factories

• Identify training opportunities

• Expand vendor ownership program to additional factories

Determine how to utilize recom-mendations of MFA Forum

• Develop strategy to guide responsible decision-making in post-quota environment

Collaborate Help develop standardized indica-tors for monitoring and reporting in the apparel and footwear industry

• Continue support for the Joint Initiative on Corporate Accountability and Workers’ Rights and explore other opportunities to accelerate and expand reach of work

• Participate in the Global Reporting Initiative’s (GRI) working group to develop an apparel and footwear sector supplement

Influence expansion of programs that lead to sustainable improve-ments in factory working conditions

• Influence garment manufacturers to implement factory improvement programs

• Explore opportunities to expand Cambodia ILO model to other countries

Improve ability to bring issues to the surface through strengthening of stakeholder engagement at the local level

• Continue developing expertise of compliance management team on stakeholder engagement and capacity building

• Identify local organizations with capacity to deliver factory-based training and MFA Forum-related work

Develop deeper understanding of homeworker challenges

• Continue participating in the ETI working group on homeworkers

Communicate Increase transparency into Gap Inc. business practices

• Evaluate reporting strategy to ensure that communication is meaningful to stakeholders and provided at appropriate intervals

• Continue efforts to develop metrics that can be used to compare performance over time

Expand understanding of industry issues and stakeholder priorities

• Continue stakeholder outreach sessions

• Link local stakeholders to relevant global organizations to facilitate a coordinated approach to engagement at all levels

2005–06 GOALS

The lack of consistent standards and enforcement

mechanisms in our industry makes it virtually

impossible to compare performance over time and

across companies in a meaningful way. Just as

Generally Accepted Accounting Principles (GAAP)

took decades to evolve, we expect it will be years

before the garment industry adopts a standardized

approach to tracking, evaluating and reporting on

factory compliance.

Still, we believe that “what gets measured gets

managed.” Despite its imperfections, monitoring

data is an important tool to help us assess our

performance, understand factory conditions and

improve our efforts over time.

Factory monitoring remains a key element of our

efforts to improve working conditions in the apparel

industry. On-site inspections give us first-hand insight

into whether factories are adhering to the labor,

health and safety standards in our Code of Vendor

Conduct (COVC). This helps us measure performance,

guide improvement and shape our long-term strategy.

Getting an accurate picture of factory conditions,

however, is more difficult than it seems. In many

ways, monitoring is more art than science.

A number of variables – ranging from the complexity

of a violation to the level of trust among workers – can

affect results. Nearly a decade after we formed our

Global Compliance department, we are still exploring

ways to better capture and measure the impact of our

monitoring program.

We believe that “what gets measured gets managed.”

Despite its imperfections, monitoring data is an important

tool to help us assess our performance, understand factory

conditions and improve our efforts over time.

14 FORGING SUSTAINABLE SOLUTIONS THE ART OF FACTORY MONITORING

The Art of Factory Monitoring

15Gap Inc. 2004 Social Responsibility Report

DEVELOPING EFFECTIVE MONITORINGOur Global Compliance team fi elds more than 90

individuals around the world who are as diverse as

the garment manufacturers from which we source.

Most of them are Vendor Compliance Offi cers, or

VCOs. They are the eyes and ears of our monitoring

program. They spend their days visiting factories,

conducting inspections, documenting violations of our

COVC, and working with garment manufacturers and

others to build capacity for greater compliance.

We aim to hire VCOs from the country or communities

in which they work, since local knowledge greatly

enhances their ability to detect issues and communi-

cate with factory managers and workers. To ensure

that our VCOs remain objective and focused on

improving working conditions, the Global Compliance

team sits outside of the sourcing organization and

is not responsible for quality assurance or any

other functions.

In addition to cultural understanding and indepen-

dence, effective factory monitoring requires skill,

training and experience.

Some compliance violations are simply easier to

fi nd than others. For example, it isn’t hard to see if a

factory has an adequate number of emergency exits on

each fl oor. On the other hand, it requires much more

skill and tenacity to determine if factory managers are

deliberately disguising excessive overtime hours with

false records or worker intimidation.

A VCO must look beyond the visible evidence in a

factory and piece together information from a variety

of sources – including time cards, production records,

pay slips, broken needle logs and one-on-one

conversations with workers. The more experienced

the VCO, the more information – and violations – he or

she is likely to uncover.

MAKING SENSE OF MONITORING DATA

Differences within the industryBecause there is no single monitoring standard in

the apparel industry, codes of conduct, frequency and

scope of monitoring, and team training all vary widely

across companies. As a result, monitoring data also

varies widely.

Highly-skilled compliance monitors naturally fi nd

more problems than less-skilled monitors conduct-

ing cursory inspections – even in the same factories.

Large, dedicated teams conducting thousands of in-

spections across a supply chain are likely to fi nd more

compliance issues than smaller teams monitoring a

sampling of factories on a part-time basis. Their data

reports look very different from one another, but the

difference isn’t necessarily in the factory conditions.

It’s in the amount of information gathered.

Differences among regionsOn a smaller scale, we have faced similar challenges

when we compare fi ndings from our own VCO teams

in different regions.

THE ART OF FACTORY MONITORING FORGING SUSTAINABLE SOLUTIONS

2004 FULL-TIME GLOBAL COMPLIANCE EMPLOYEES

REGION

Greater China 16

North Asia 5

Southeast Asia 16

Indian Sub-Continent 12

Persian Gulf1 0

North Africa & the Middle East 2

Sub-Saharan Africa 4

Europe (including Russia) 6

United States & Canada2 21

Mexico, Central America & the Caribbean 9

South America 1

Total 92

# of fu

ll-tim

e Glob

al

Compli

ance

emplo

yees

1 The Persian Gulf region is covered by the Indian Sub-Continent team.2 Includes corporate headquarters staff based in San Francisco.

16 FORGING SUSTAINABLE SOLUTIONS THE ART OF FACTORY MONITORING

Sometimes this is due to regional differences in our

sourcing base. Production naturally expands and

contracts in different areas at different times. In any

given year, we may approve a significant number of

new factories in one country and experience low turn-

over in another. Since new factories tend to have a

more limited understanding of our requirements than

established factories, the level of turnover in a region

is a significant factor in the overall level of compliance.

In other cases, our VCOs may approach their work

slightly differently from region to region, depending on

background, experience, and the political, economic,

and social context in different countries. We main-

tain global policies and procedures that limit these

differences, but at the same time, we must provide

flexibility to accommodate local needs and priori-

ties. In 2004, we noticed some regional variations in

our monitoring and factory rating data that appeared

to stem more from divergent team procedures than

actual conditions on the ground. In 2005, we will be

working to improve our global monitoring procedures

to reduce these differences.

Differences from year to yearJust as we find differences between regions, we also

face challenges when we try to compare our global

data from year to year. As our VCOs gain more

experience, they are often able to uncover more

compliance violations. As a result, we’ve seen the

total number of issues we find increase over time.

Does this mean that factory conditions are

deteriorating? Or are we simply getting better at find-

ing existing problems? Similarly, if we see a decrease

in the number of issues from one year to the next,

how do we know that factory conditions have really

improved? How can we be sure that we didn’t just

miss something in our inspections?

We addressed this issue in 2004 when we invited SAI

and Verité to conduct external reviews of our program.

SAI examined our management systems and pro-

cesses and audit planning, while Verité conducted a

program and training needs assessment that included

inspections of our approved facilities and a compari-

son of their findings with our own. We then asked both

groups to conduct specialized training for our team

in October 2004. SAI focused on the complex issues

of freedom of association, discrimination and how to

improve factory management systems, while Verité

demonstrated ways to further improve our monitoring

skills and support our vendor ownership goals.

After these training sessions, we saw an increase in

the number of violations found by our VCOs during

factory visits. Had the factories gotten worse?

Probably not. More likely, the training helped improve

our ability to find issues.

IMPROVING MONITORING DATAAssessing factory performance over time is one of

the most difficult tasks we face. Nevertheless, there

are concrete steps we can take to refine and interpret

monitoring data to give us meaningful insight into our

performance and impact at the factory level.

In the absence of standardized monitoring protocols

and training at the industry level, we can continue to

standardize and improve our own internal policies and

procedures. We can reduce differences in how our

own country and regional teams do their jobs and in-

troduce global training to reinforce the same baseline

approach for everyone. We can also continue to seek

external verification to ensure that we remain aligned

with leading practices and perform to high standards.

17Gap Inc. 2004 Social Responsibility Report

IN HER OWN WORDSJyotsna Belliappa

Growing up in India in the last decade has been exciting.

India is in the throes of change. The old order is changing,

but the new order is not yet in place.

In 1999, my decision to become a Vendor Compliance

Officer at Gap Inc. pulled me into this whirl of change.

Although I had worked previously with women’s issues and sustainable com-

munity development on coffee plantations, I found the practices in the garment

industry in urban Bangalore totally perplexing. It was difficult to understand

why a vendor would resort to excessive overtime when it ate into his profits.

Why would a supervisor scream at a worker who was so critical to production?

Why did administrators waste time maintaining false sets of records when it

was simpler to maintain transparent records?

My questioning of the industry brought one consistent but unsatisfying answer –

“industrial practice.” I realized that industrial practice had become a comfortable

refuge. When you’re comfortable, you don’t like to change or ask questions.

When, as a VCO, I demanded change, I was considered a troublemaker. I was

told that if we stopped overtime, workers would strike because they needed the

extra money. I was told that screaming was necessary because it was the only

language that workers understood. And so on.

Yet over time, as I have shared Gap Inc.’s ethical sourcing principles with our

partners in South India, I have witnessed steady, albeit slow, change. Experience

is proving that better planning reduces the need for overtime, and more efficient

production processes give workers the opportunity to earn more in fewer hours.

When workers are being paid according to the law, there is no need to keep

different sets of records. As workers see these changes, they reciprocate with

fewer grievances against management, greater motivation and increased quality

of production.

We are beginning to see a paradigm shift in the definition of “industrial

practice” in India. There is still much to learn and change. Yet every time a best

practice becomes a common practice, I know it’s a small victory. Slowly but

surely, the concept of “compliance” is evolving into the possibility of corporate

social responsibility.

Jyotsna Belliappa is the Gap Inc. Vendor Compliance Manager for South India.

We can also look at progress in different ways and

recognize that it will occur at different rates – depend-

ing on the type of violation, the factory and the country.

When we released our first report, many readers were

surprised by all the problems in garment factories.

We know change is possible, but it is likely to occur in

stages and over time.

In the near term, progress is likely to mean that we

find more violations, not less, especially in challenging

areas such as discrimination and freedom of associa-

tion. We hope that, as we work with fewer garment

manufacturers for longer periods of time, these num-

bers will begin to level off and, eventually, decrease.

ASSESSING OUR MONITORING EFFORTS: HOW DID WE DO IN 2004?

Setting a bar for entryLast year, we continued to require that all garment

manufacturers and subcontractors pass our approval

process before we placed any orders. This process,

discussed in detail in our 2003 report, can take any-

where from a week to more than a year to complete.

No garment production can be placed until the Global

Compliance team has signed off.

Our 2004 approval rate was similar to our approval

rate in 2003. We rejected 15 percent of the new

factories we evaluated, compared with 16 percent in

2003, and evaluated 199 fewer new factories. Because

the elimination of textile quotas earlier this year is al-

lowing us to keep more of our production in currently

approved factories, we had less need to bring new

factories on line in 2004. For further information on

the impact of post-quota consolidation on our manu-

facturing base, please see page 28.

THE ART OF FACTORY MONITORING FORGING SUSTAINABLE SOLUTIONS

18 FORGING SUSTAINABLE SOLUTIONS THE ART OF FACTORY MONITORING

What do these numbers mean?We still face many challenges with our approved

factories. However, our approval process does have

a measurable impact on factory compliance levels.

Approved factories tend to have fewer overall compli-

ance issues than factories that have not yet gone

through the process. The only violation we fi nd more

frequently in approved factories is related to our

overtime policy, and this is due to the fact that we have

the opportunity to review factory records for longer

periods of time and during peak production cycles.

Monitoring our approved factory baseOnce a garment factory is approved, we aim to visit it

at least once a year. For some, we conduct more

visits. In 2004, our VCOs conducted approximately

6,750 inspections in 2,672 garment factories around

the world. This is a decrease of about 1,750 inspec-

tions and 337 factories compared to 2003, due primar-

ily to consolidation in our manufacturing base.

IA IB IIA IIB IIIA

IIIB

IVA

IVB

VA VB VC VD VIA

VIB

VIC

VID

VIE

VIF

VIG

VIIA

VIIB

VIIC

VIID

VIIE

VIIF

VIIG

VIIH

VIII

VIIJ

VIIL

VIIM

VIIN

VIIO

VIIP

VIIQ

VIIIA

VIIIB

VIIK

0%

10%

20%

30%

40%

50%

REGION

Greater China 93 68% 26% 6%

North Asia 11 91 9 0

Southeast Asia 75 78 7 15

Indian Sub-Continent 64 87 8 5

Persian Gulf 1 100 0 0

North Africa& the Middle East 30 73 13 14

Sub-Saharan Africa 21 62 29 9

Europe (including Russia) 57 70 21 9

United States & Canada 20 80 5 15

Mexico, Central America & the Caribbean 68 88 9 3

South America 14 64 29 7

Total 454 77% 15% 8%

# of new

garm

ent

factor

ies ev

aluate

d

Approve

d

Not ap

prove

d

Pending

2004 FACTORY APPROVAL DATA

2004 DOCUMENTED COMPLIANCE VIOLATIONS: NEW FACTORIES VS. APPROVED FACTORIES

New Factories

DiscriminationForced Labor

Child LaborWages & Hours

Working ConditionsFreedom of Association

General PrincipleEnvironment

Violation Categories:

For a detailed explanation of each type of violation, see pp. 22-23.Approved Factories

19Gap Inc. 2004 Social Responsibility Report

In 2004, we inspected 99.9 percent of the garment

factories approved for all of fi scal year 2004, and 90.4

percent of factories approved for less than 12 months.

This was an increase of approximately 6 percent and

4 percent, respectively, over 2003. In addition, our

VCOs held approximately 1,300 other meetings with

factory managers to help resolve compliance issues,

facilitate worker and management training sessions,

or review the policy and procedures of our program.

Going forward, we expect the total number of

inspections to continue to decrease. This is both

because we anticipate more consolidation in

our manufacturing base and because we plan to

redefi ne our monitoring protocols to allow for longer

inspections at larger factories.

In the post-quota world, garment factories will prob-

ably increase in size to take advantage of economies

of scale. Many will employ thousands of workers.

In this new context, our monitoring program will be

more effective with fewer, but longer, inspections in

each factory – a practice confi rmed by the recom-

mendations of SAI and Verité. Dedicating more people

and more time to each of our inspections will give us

a more detailed picture of factory conditions.

This will also help us identify the root causes of

violations and devote more time to remediating them.

We anticipate that this decrease in the number of

inspections will be complemented by an increase in

the number of other meetings and training sessions

that VCOs hold with factory managers and workers.

These sessions, in which we often partner with exter-

nal groups to provide training, help factory managers

understand how to fi x problems more effectively and

prevent them from recurring. As their understanding

grows, we will expect manufacturers to assume more

responsibility for their own business practices.

ASSESSING FACTORIES: WHAT DOES PROGRESS LOOK LIKE?We did not see signifi cant changes in overall factory

compliance levels from 2003 to 2004. In fact, we would

have been surprised if we had, given the ongoing

changes in our supply base, new program procedures

and the fact that remediation simply takes time.

1 Two approved factories did not receive an evaluation in 2004. One, located in the Philippines, experienced a meningitis outbreak that forced our VCO to postpone his inspection until it was safe to enter the factory. The other, in Belgium, is the only approved factory in that country and serves primarily as a center for distribution of merchandise to our retail stores. The facility has a small sewing section for the repair of defective products found in shipments from other factories but does not manufacture any garments directly.

Changes in our manufacturing baseThe factories in our base continued to shift from

2003 to 2004. We approved 349 new factories in 2004.

Since new factories tend to have less knowledge of

our compliance expectations than established

factories, they are more likely to have compliance

problems, especially in basic health and safety areas.

THE ART OF FACTORY MONITORING FORGING SUSTAINABLE SOLUTIONS

2004 FACTORY MONITORING DATA

REGION

Greater China 219 100% 423 97.9%

North Asia 64 100 138 82.6

Southeast Asia 350 99.7 603 94.5

Indian Sub-Continent 299 100 525 90.9

Persian Gulf 18 100 29 89.7

North Africa& the Middle East 30 100 92 83.7

Sub-Saharan Africa 53 100 103 91.3

Europe (including Russia) 91 98.9 257 81.3

United States & Canada 33 100 151 76.2

Mexico, Central America & the Caribbean 87 100 280 91.1

South America 34 100 71 93.0

1,278 99.9%1 2,672 90.4%

# of gar

men

t fac

tories

% of fa

ctorie

s visi

ted

# of gar

men

t fac

tories

% of fa

ctorie

s visi

ted

Pending

AP

PR

OVE

D F

OR

ALL

OF

FY2

004

AP

PR

OVE

D F

OR

ALL

OR

PA

RT

OF

FY2

004

20 FORGING SUSTAINABLE SOLUTIONS THE ART OF FACTORY MONITORING

Better documentation proceduresWe modified our internal policies and procedures on

documentation in 2004. It isn’t always easy for VCOs

to determine how to categorize a specific factory

issue. For example, when a factory fails to pay the

minimum legal wage to workers, this violates both

local law (Section IA of our COVC) and our minimum

wage requirement (Section VIA of our COVC). In 2003,

we discovered that VCOs were sometimes classify-

ing issues as violations of local law when they could

be classified more specifically elsewhere. Last year,

we took time to clarify our internal policy, noting that

all violations should be documented under the most

precise COVC requirement available. As a result, we

saw a 5.5 percent global decrease in the number of

local law violations, with corresponding increases in

other areas (in particular, Section VIIC on local laws

on working conditions).

External training on monitoring skillsAs mentioned earlier, we underwent external assess-

ments by SAI and Verité. We asked them to review

our overall program and help our team better detect

compliance violations – especially those related to

discrimination and freedom of association. As a result,

our VCOs demonstrated better detection rates in the

second half of 2004, which resulted in small percent-

age increases in some violation categories.

Notably, we also saw small increases in our documen-

tation of factories with cases of discrimination. In part,

this demonstrates what our team learned from the SAI

training sessions in October 2004. Nonetheless, we

continue to believe that these violations, and those of

freedom of association, are more widespread than our

data suggest. Many of these issues first come to our

attention through third parties, such as trade unions or

NGOs, rather than our own monitoring efforts. We

plan to introduce more targeted training to improve

our work in these areas in the future, and explore ways

to integrate trade union and NGO insights more

systematically into our monitoring processes.

Remediation takes timeAnother reason we did not see significant changes

from 2003 to 2004 is that the most difficult compli-

ance violations take time to resolve. Many cannot be

remediated through the monitoring process in ways

that address their root causes and prevent them from

happening again. To see lasting improvements, we

have to supplement our monitoring with more train-

ing and development opportunities; help manage-

ment develop more efficient production processes

and better supervisory skills; and help workers learn

how to assert their rights and seek recourse when

problems arise. We would also like to encourage

manufacturers to invest in new and better technolo-

gies that will improve factory productivity without

straining worker capacity.

Although we have been monitoring for several years,

we are still in the early stages of this more compre-

hensive approach to remediation. Later in this report,

we share some of what we have learned from pilot

projects and collaborative initiatives. Ultimately,

we hope to use this work with external partners to

complement our monitoring – not only to continue

improving our ability to detect issues, but more

important, to resolve them effectively and prevent

them from recurring.

22 FORGING SUSTAINABLE SOLUTIONS THE ART OF FACTORY MONITORING

SECTION IV – FORCED LABORWe found one instance in 2004 in which workers in a Chinese factory were not permitted to resign (if they so desired) during the peak production season. We revoked approval of the factory.

We also found a case in Honduras where the doors in one production area were locked, thus preventing workers from being able to leave. We asked the factory to correct the situation immediately and confirmed a few weeks later through a physical inspection and interviews with workers that the doors were and had remained unlocked. We continue to monitor the factory.

We recorded three cases in Egypt, Morocco and Vietnam, respectively, in which factories maintained a clause in their employment contracts requiring workers to pay a fee if they resigned before the contract ended. In each of the three cases, we required the factories to remove this clause and followed up in subsequent visits to confirm that it had been deleted.

The size and scope of this chart preclude a thorough analysis of issues in all regions. However, the following discussion highlights some of our key findings in 2004.

REGION1

No. of approved factories in 2004

No. of factories revoked for compliance violations

GENERAL PRINCIPLE

IA Lacks full compliance with local laws

IB Restricted access of Gap Inc. representatives

ENVIRONMENT

IIA Lack of environmental management system or plan

DISCRIMINATION2

IIIA Employment

IIIB Wages & benefits

FORCED LABOR

CHILD LABOR

VA Workers are not 14 years old or do not meet minimum legal age requirement

VB Not in full compliance with child labor laws

VC Failure to allow eligible workers to attend night classes and/or participate in educational programs

VD Poor age documentation

WAGES & HOURS

VIA Pay is below minimum wage

VIB Overtime rates are below legal minimum

VIC Work week in excess of 60 hours

VID Workers cannot refuse overtime without threat of penalty or punishment

VIE Workers do not have at least 1 day off in 7

VIF Violation of local laws on annual leave and/or holidays

VIG Unclear wage statements

LEGEND

No code violations verified

Violations verified in less than 1% of factories

Violations verified in between 1% and less than 10% of factories

Violations verified in between 10% and less than 25% of factories

Violations verified in between 25% and less than 50% of factories

Violations verified in more than 50% of factories

423 138 603 525 29 92 103 257 151 280 71

18 0 18 23 0 3 6 1 1 0 0

IVB For foreign contract workers, non-payment of agency recruitment fees and/or requiring workers to remain in employment against their will

IVA Use of involuntary labor

IIB Insufficient notification procedures in case of environmental emergency

2004 CODE VIOLATIONS

Persia

n Gulf

Sub-Sah

aran

Africa

South

Amer

ica

North

Africa

Mexico

, Cen

tral A

mer

ica

United Stat

es &

Can

ada

Indian Sub-C

ontin

ent

Europe (

including R

ussia)

& the C

aribbea

n

& the M

iddle Eas

t

South

east

Asia

North

Asia

Greate

r China

23Gap Inc. 2004 Social Responsibility Report THE ART OF FACTORY MONITORING FORGING SUSTAINABLE SOLUTIONS

SECTION V – CHILD LABORLast year, we uncovered three cases in China in which workers had been hired just before they turned 16 years old, which is the legal working age in China. We revoked approval of all three factories. We also observed a relatively high occurrence of problems with age documentation in China. While most of these violations were relatively minor, such as a missing photo in a personnel record, we continue to monitor this issue vigilantly and will investigate further if we suspect any falsification of documents.

REGIONAL ISSUES

ChinaFreedom of association is an especially complicated issue in the Chinese legal context. We recognize that Chinese workers, like all workers, have an important voice that needs to be heard by management in a regular and consistent way. Chinese law, however, stipulates that workers may organize only under the umbrella of the government-sponsored trade union. We are currently examining ways in which we can facilitate lawful “parallel means” to free association in China in order to provide workers with the opportunity and means to raise concerns and seek solutions without the fear of repercussions. We have begun taking small steps in a few Chinese factories to facilitate the formation of worker committees around health and safety issues and recreational activities.

Persian GulfWe saw a significant increase last year in overtime violations by factories in the Persian Gulf. We believe this was due in large part to production pressures stemming from fabric delays, as well as shifts related to quota requirements. The factories corrected the problems upon our request. However, we will monitor this situation closely in 2005.

South AmericaWe saw a notable increase in several categories of violations in South America. This region experienced significant growth in production last year and was one of only two regions worldwide where the number of approved factories increased in 2004. Most of the violations involved health and safety issues, such as blocked aisles, missing exit signs and a lack of machinery safety devices. These types of issues tend to be more common in facilities that have been approved for shorter periods of time. We are continuing our work with our South American manufacturers to help them better understand our requirements with the expectation that they will demonstrate improved performance over time.

1 The map on pp. 6-7 provides a breakdown of sourcing countries in each region.

2 We believe that violations in these areas are more widespread than our data suggest. For more informa-tion, please see p. 20.

WORKING CONDITIONS

VIIA Physical punishment or coercion

VIIB Psychological coercion and/or verbal abuse

VIIC Violation of local laws on working conditions

VIID Insufficient lighting

VIIE Poor ventilation

VIIF Insufficient or poorly marked exits

VIIG Obstructed aisles, exits or stairwells

VIIH Locked or inaccessible doors and exits

VIIK Not enough evacuation drills

VIIL Machinery lacks some operational safety devices

VIIM Inadequate personal protective equipment

VIIN Insufficient access to potable water

VIIO Inadequate first-aid kits

VIIP Unsanitary toilets and/or restricted access

FREEDOM OF ASSOCIATION2

VIIQ Inadequate storage of hazardous and combustible materials

VIIJ Insufficient number of fire alarms and/or emergency lights

VIII Insufficient number of and/or inadequately maintained fire extinguishers

VIIIB Penalization or interference with workers’ lawful efforts to organize

VIIIA Workers are not free to choose whether or not to lawfully organize and join associations

Mexico

, Cen

tral A

mer

ica

Persia

n Gulf

Sub-Sah

aran

Africa

South

Amer

ica

North

Africa

United Stat

es &

Can

ada

Indian Sub-C

ontin

ent

Europe (

including R

ussia)

& the C

aribbea

n

& the M

iddle Eas

t

South

east

Asia

North

Asia

Greate

r China

South

Amer

ica

21Gap Inc. 2004 Social Responsibility Report

FACTORY PERFORMANCE IN 2004We noted in 2003 that few factories, if any, are in full

compliance all of the time. Our goal is to work with

factory managers to fix problems where we find them

and work to prevent them from recurring. However,

serious or excessive COVC violations sometimes

require us to terminate a business relationship.

Last year, we revoked our approval of 70 factories

for compliance violations, about 2.6 percent of our

approved base. This is down from 136 factories,

or 4.5 percent, in 2003.

We attribute this decrease largely to the fact that we

uncovered fewer instances of false recordkeeping

last year. This is a violation that we will not tolerate

and that has led us to revoke several factory approv-

als in the past. During the past two years, we have

stressed to manufacturers the importance of showing

VCOs true, accurate records. We prefer to work with

manufacturers who are honest about their challenges

rather than those we cannot trust. Since we made

no changes to our detection process, we hope this

decrease suggests that our words and actions have

had an impact.

The chart on the next two pages illustrates the

frequency of code violations documented by our VCOs

in approved garment factories in 2004.

“ Our experience tells us that the most responsible

companies can be the ones that report a rise in

labor rights abuses. Rather than the real situation

for workers getting worse, it may be that the brand

has gotten better at detecting problems. But

diagnosis is only step one. It is more important to

see companies reporting corresponding increases

in the number of problems that have actually

been resolved.” Dan Rees, Ethical Trading Initiative (ETI)

THE ART OF FACTORY MONITORING FORGING SUSTAINABLE SOLUTIONS

CHANGE IN % OF FACTORIES WITH DOCUMENTED CODE VIOLATIONS BY TYPE

Percent change 2004 vs. 2003

Violations:

General Principle

Environment

Discrimination

Forced Labor

Child Labor

Wages & Hours

Working Conditions

Freedom of Association

For a detailed explanation of each type of violation, see pp. 22-23.

RATING FACTORIES ON COMPLIANCE PERFORMANCEIn last year’s report, we introduced a rating tool that

quantifi es our inspection data and helps us compare

factory performance from year to year. Factories

receive ratings based on the number and type of

issues documented during inspections over a 12-month

period, as well as how often the issues recurred and

how long it took factory management to resolve them.

What we learned from the pilot phaseThe pilot phase of this project has been very instruc-

tive. Although we apply the same monitoring protocol

globally, we’ve learned that certain regional differ-

ences, such as the number of VCOs conducting an

audit, can impact ratings and affect rating distribu-

tions in different countries.

In 2005, we will be evolving our global monitoring

protocol to incorporate specifi c regional needs and

address recommendations from SAI and Verité. We

hope this will help reduce variation among countries.

2004 FACTORY RATING DATAThe following chart shows our 2004 rating data. These

ratings were calculated using the same methodology

as those reported in 2003.

We are continuing to work toward the implementation

of a new tracking and reporting system, which

will enable us to analyze our monitoring data in a

more sophisticated manner. We hope to refi ne our

rating tool as our technical infrastructure evolves.

CHANGES FROM 2003 TO 2004Because of differences across countries in local

laws, average factory size and cultural comfort levels

with sharing concerns, comparing countries can be

diffi cult. As such, the following section reviews rating

changes from 2003 within each country.

CambodiaRatings in Cambodia were generally stable in

2004. Of the factories rated in both 2003 and 2004,

83 percent either maintained or increased their

ratings. Four factories fell back, and just one is

currently rated Level 1.

LesothoIn Lesotho, 90 percent of the factories rated in 2003

either maintained or increased their ratings last year.

Two factories are currently rated Level 1. We are

continuing to work with these factories to help

them improve their performance.

El SalvadorIn El Salvador, 100 percent of the factories rated in

2003 maintained or increased their ratings in 2004.

Two factories, both of which were newly approved

in 2004, are currently rated Level 1.

Guatemala and HondurasIn both Guatemala and Honduras, more than half

of the factories rated in 2003 experienced a rating

decline last year. This decline may be due in part to

the fact that we expanded our staff in Central America

and were able to conduct more factory inspections.

However, we are investigating further to determine if

there may have also been a decline in conditions.

24 FORGING SUSTAINABLE SOLUTIONS THE ART OF FACTORY MONITORING

2004 FACTORY RATING DATA

COUNTRY

Cambodia 1 2 9 14 6 32

China 49 51 68 54 14 236

El Salvador 2 0 2 1 5 10

Guatemala 3 4 7 3 0 17

Honduras 3 2 1 5 2 13

Lesotho 2 3 4 3 0 12

Level

2 (Nee

ds Im

prove

men

t)

Level

3 (Fa

ir)

Level

4 (Goo

d)

Level

5 (Exc

ellen

t)

Total

Level

1 (Urg

ent A

ttentio

n Req

uired)

25Gap Inc. 2004 Social Responsibility Report

2004 EXTERNAL PROGRAM ASSESSMENTSThird-party assessments of our work are essential

in helping us identify opportunities for future devel-

opment. External stakeholders challenge us with

different perspectives, set new expectations and hold

us accountable for results.

In 2004, we fulfilled our goal to participate in SAI’s

independent evaluation of our Global Compliance

program. Respected for its expertise in management

systems, SAI examined our program in its entirety,

conducting interviews with our corporate leadership

team, reviewing our internal policies and procedures,

and “shadowing” VCOs during factory inspections in

the field. We also asked Verité, an organization known

for its expertise in auditing, training and analysis, to

conduct a focused assessment of our monitoring pro-

gram and procedures, including our goals and impact,

and the training needs of our field team. Both evalu-

ations reinforced some of our best practices, such as

the inclusion of all of our garment manufacturers and

subcontractors within our program’s scope and the

experience and enthusiasm of our compliance team.

They also identified areas for improvement, such as

the need to restructure our monitoring teams to use

their time more efficiently and to develop a formal

training program for our approved garment factories.

Each organization provided a summary of its findings

for this report, which appear on pages 26-27.

We have planned several initiatives for 2005 and 2006

that incorporate the recommendations from SAI and

Verité. These include reviewing our COVC against

multi-stakeholder codes such as SA8000 and the

Ethical Trading Initiative (ETI) Base Code, revising our

monitoring protocol, and providing additional training

for our team on challenging compliance issues. For

more information, please see our goals for 2005–06

on page 13.

ChinaIn China, 51.8 percent of the factories rated in 2003

maintained or increased their ratings in 2004. Of the

factories rated Level 1 in 2003, a majority either

improved their ratings or were removed from our

active production base last year.

Despite these positive changes, we were concerned

by the year-on-year decline of 48.2 percent of the

facilities rated in both 2003 and 2004 in China. We

believe this is due to three factors.

First, our local VCOs improved the accuracy of their

documentation of issues. Documentation is extremely

important in the calculation of ratings, since issues

receive weightings in the rating formula based on

their relative severity. For example, IA (local law)

violations are not considered as serious as other

types of violations. In 2003, Greater China had one of

the highest rates of IA violations in the world. Upon

analysis, however, we discovered that many of these

violations could have been classified more accurately

under a different COVC item. Last year, the VCO team

in China took steps to improve their approach and list

violations under the most specific COVC section pos-

sible. This led to an overall increase in other types of

issues, some of which were weighted more heavily in

the rating formula.

Second, our team increased the number of joint

inspections in Chinese factories last year. With more

people in the factory, our ability to find violations

improved.

Third, we believe that the number of compliance

issues in some areas simply increased. Several areas

in China experienced labor and power shortages last

year, which led to significant disruptions in produc-

tion. Because some factories sought to compensate by

working longer hours, we saw more violations of our

overtime provisions. Since overtime requires factories

to pay workers more, we also saw an increase in wage

violations. Both of these are serious issues, so the

increases weighed heavily on factory ratings.

THE ART OF FACTORY MONITORING FORGING SUSTAINABLE SOLUTIONS

AUDITING:

The observed VCO teams are highly motivated and do

a very competent job in many aspects. Nevertheless,

their time is used inefficiently. VCOs are deployed on

an excessive number of short visits – typically only one

day per factory (not enough for a thorough job) –

rather than more concentrated, in-depth,

well-planned audits. Like most social auditors,

VCOs lack sufficient skill in hard-to-audit areas like

freedom of association and discrimination.

Key Recommendations: Deploy VCOs in a more

concentrated manner, with longer audits at larger

facilities and less frequent monitoring. Provide formal

auditor training, make passage of auditor exams a job

qualification and, over time, shift to more diagnostic

audits by third-party accredited auditors.

DEVELOPMENT APPROACH:

Gap Inc. has no formal training program for its

suppliers, managers or workers.

Key Recommendation: Develop and provide a

regular program for supplier training in compliance

requirements, worker rights and human resources

management.

MULTI-STAKEHOLDER PARTICIPATION:

Gap Inc. engages in several multi-stakeholder

initiatives and has recently expanded that involvement.

Gap Inc. is highly regarded by these groups.

Key Recommendation: Develop a more coordinated

strategy to work with trade unions and their local

affiliates.

TRANSPARENCY:

Gap Inc.’s “warts and all” 2003 Social Responsibility

Report received well-deserved praise from stakehold-

ers and the public.

Key Recommendation: Provide more measures of

progress and disclose more numerical performance

targets.

Gap Inc. participated in SAI’s Corporate Involvement

Program (CIP) Pilot Assessment, an objective evalu-

ation of its social compliance program. It included a

headquarters visit, a transparency review by Sustain-

Ability, and SAI field reviews of Vendor Compliance

Officer (VCO) audits at factories in China, Turkey,

Guatemala and India.

The assessment was based on the five elements listed

below. Findings were shared with a multi-stakeholder

review panel that presented a set of recommendations

to Gap Inc. The panel members were Neil Kearney,

Secretary General of the International Textile, Gar-

ment & Leather Workers Federation, Dorianne Beyer,

General Counsel of the National Child Labor Commit-

tee, and Achim Lohrie, Head of Strategy Development

and Controlling, Environmental and Social Policy

Department, Otto (GmbH).

Key Findings & Recommendations

MANAGEMENT SYSTEMS:

Gap Inc.’s scope of compliance procedures encom-

passes all its vendor facilities, including subcontrac-

tors. A planned incentive-based “strategic supplier”

program will link compliance with traditional quality

and reliability ratings of vendors. Both are impressive

best practices.

Key Recommendations: Include contract employees,

homeworkers, supervisory and management person-

nel within monitoring scope. Link “strategic supplier”

performance to an internationally recognized multi-

stakeholder standard and to measurable improvement

towards meeting that standard.

26 FORGING SUSTAINABLE SOLUTIONS THE ART OF FACTORY MONITORING

GAP INC. ASSESSMENT AND RECOMMENDATIONSSocial Accountability International

27Gap Inc. 2004 Social Responsibility Report THE ART OF FACTORY MONITORING FORGING SUSTAINABLE SOLUTIONS

NOTE:Gap Inc. compensated SAI and Verité for their assessments. Both groups have also provided consulting services to the company on auditing and training issues. Gap Inc. is a member of SAI’s Corporate Involvement Program.

In 2004, Gap Inc. commissioned Verité, a not-for-

profi t monitoring, training and research organization,

to study its Global Compliance program. The aim was

to enhance program effi ciency and scope by identify-

ing strengths and weaknesses in Gap Inc. vendor

engagement, internal training and management

systems, as measured against company goals and

external best practices.

The Assessment provided a quantitative evaluation

of Gap Inc.’s performance, assessing the effective-

ness of Gap Inc. auditors at identifying various types

of Code of Conduct violations in sample factories

and the extent to which violations were remediated.

Verité’s Assessment also engaged Global Compli-

ance fi eld and headquarters staff and factory manag-

ers in discussions about their work, program impact

and priorities for improvement. Verité recommended

measures to strengthen management systems, build

fi eld capacity, support vendor ownership, strengthen

facility monitoring and broaden relations with external

stakeholders.

Global Compliance program strengths included:• Decentralized and fl exible structure, management

and operations

• Support for openness and innovation

• Experienced staff and an effective “on-boarding”

process

• Well-documented systems and procedures

• Integration of social compliance policy into

corporate strategy and planning

• Engagement with external stakeholders

Photo:Members of the Gap Inc. Global Compliance team participate in a training session led by Verité in Bangkok, Thailand.

Key recommendations included:• Increase the level of credible information

gathered from workers

• Strengthen alignment between sourcing and

compliance strategies

• Capture best practices and lessons learned in the

fi eld, especially remediation strategies

• Standardize training, fi eld protocols and processes

• Increase technical support and training to fi eld

staff on chronic compliance issues, root cause

analysis, corrective action planning and gathering

information from workers

• Re-orient fi eld staff and match staff competencies

to the remediation function to increase the impact

of the Vendor Ownership Program

• Increase vendor support through such initiatives

as social compliance management training

GAP INC. PROGRAM AND TRAINING NEEDS ASSESSMENT Verité

Reengineering our supply chain has been a top

priority since Gap Inc. launched its financial turnaround

three years ago. Historically, a system of quotas made

it difficult to manage our supply chain strategically.

Strict limits on the amount of apparel that compa-

nies could import from any one country forced us to

spread production across more sourcing markets

than we liked. Because they couldn’t always rely on

large quantities of our business, our manufacturers

had limited incentive to partner with us to improve

their operations.

The expiration of these quotas at the end of 2004 has

given us an opportunity to consolidate our sourcing

base, reinvent our relationships with manufacturers

and transform our supply chain into one that truly

reflects our values and business needs.

Although we now have more control over where

we do business, we don’t intend to put all of our

production in one place. We believe we need a diverse

sourcing network to mitigate geographic risk,

increase speed-to-market and deliver the wide

variety of products we sell in our stores.

Integrating Labor Standards into Our Business Practices

We strongly believe that making

compliance a basic part of how our

industry does business is essential

to forging sustainable solutions.

28 FORGING SUSTAINABLE SOLUTIONS INTEGRATING LABOR STANDARDS INTO OUR BUSINESS PRACTICES

29Gap Inc. 2004 Social Responsibility Report

This section discusses several ways that we are

leveraging our purchasing power and closer relation-

ships with manufacturers to integrate labor stan-

dards directly into our supply chain operations. The

various efforts we describe below – such as making

labor standards a more important part of our buying

decisions, improving factory operations and reducing

inefficiencies in our purchasing practices – are still in

the early stages of development. We strongly believe,

however, that making compliance a basic part of how

our industry does business is essential to forging

sustainable solutions. We look forward to providing

updates on our progress in this important area in

future reports.

BUILDING CLOSER RELATIONSHIPS WITH OUR GARMENT MANUFACTURERSEarlier this year, we invited our largest garment and

textile manufacturers to San Francisco for our first

Gap Inc. Global Vendor Summit to share our new

business and sourcing strategies and discuss ways to

work together more effectively.

One of our key goals is to develop a better

understanding of what our garment manufacturers

do best. The capabilities required to produce

garments can vary widely. For some garments, quality

may be a key consideration, while for others, cost or

speed-to-market might be more important. Some

manufacturers generally produce basics throughout

the year, while others are highly specialized and

seasonal. Different factories have different

competencies and strengths, and it is important

that we distribute our production accordingly. For

example, asking a small factory known for quality to

deliver a large order in a short period of time can

create risk in delivery and place unintended burdens

on factory workers. Ultimately, we must work to

ensure the strengths of our vendors are aligned with

the needs of our brands.

In 1974, the internationally negotiated Multi-Fiber

Arrangement (MFA) created a system of quotas

that put a cap on the quantity of textiles and

apparel that companies in the United States and

Europe could import from any one country. These

restrictions led to a practice known as “chasing

quota,” in which buyers met their production needs

by scattering orders over dozens of different

countries. As a result, garment industries were

artificially created in many places that otherwise

lacked the proximity, infrastructure, workforce or

cost base to compete effectively in an open market.

With the expiration of these quotas at the end

of 2004, companies are now basically free

to begin consolidating their sourcing bases and

concentrating production with preferred

manufacturers.

As we discuss in this section, we believe industry

consolidation creates opportunities to begin

integrating labor standards directly into sourcing

practices. Still, we share widespread concerns

about the consequences of consolidation for

countries that have come to rely on the garment

industry for jobs and revenue. On page 38, we

discuss our commitment to help manage a

responsible transition to a post-quota environment

through participation in the MFA Forum, a newly

formed multi-stakeholder effort.

THE END OF QUOTA

INTEGRATING LABOR STANDARDS INTO OUR BUSINESS PRACTICES FORGING SUSTAINABLE SOLUTIONS

Over time, though, we intend to start concentrating

a greater percentage of our production with our best

manufacturers. As our relationships evolve, we expect

them to work with us more closely to drive continuous

improvement in all aspects of our supply chain

operations – including innovation, quality, cost, and

labor and environmental standards.

Our Global Compliance team already influences

sourcing decisions, particularly during the initial

approval process and in cases of serious or

habitual violations. Generally speaking, however,

once Global Compliance approves a factory for

production, and unless it mandates termination for

compliance reasons, our sourcing team places

production based primarily on other performance-

related criteria, such as innovation, quality and cost.

Our new integrated sourcing scorecard will be used

by our sourcing team to make more balanced and

strategic performance-based buying decisions and

put more pressure on garment manufacturers to

improve. Each approved factory will be assigned a

compliance score based on our pilot factory rating

tool (see page 24). In the future, this metric will be

considered along with others, such as how the factory

performs against basic quality requirements, to de-

termine whether a factory is suitable for production.

We have already started to see encouraging signs

that garment manufacturers are ready to take

greater responsibility for working conditions. Last

year, for instance, four garment manufacturers we

work with in China sought SA8000 certification, a

voluntary workplace standard developed and admin-

istered by SAI. The standard, based on ILO and other

labor and human rights conventions, promotes man-

agement systems that improve working conditions.

It can take as long as two or three years to become

SA8000 certified and some factories are never able to

attain certification. Yet, one of the factories involved

satisfied the requirements in less than three months.

The other three did so in approximately five months.

Similarly, we supported a pilot program in Sri Lanka

last year in which two of our approved manufacturers

pursued SA8000 certification. One of them qualified in

just two and a half months, and the other qualified in

seven months.

30 FORGING SUSTAINABLE SOLUTIONS INTEGRATING LABOR STANDARDS INTO OUR BUSINESS PRACTICES

Most garment manufacturers provide services to

multiple clients, and today, we know little about a

specific manufacturer’s workload beyond the orders

we’ve placed. For competitive reasons, garment

manufacturers often take on more work than they can

handle, which not only jeopardizes deadlines but can

also subject workers to excessive overtime hours.

To encourage garment manufacturers to take more

responsibility for working conditions in the factories

they own, operate or contract with, we are building

labor standards directly into our buying decisions

through an “integrated sourcing scorecard.” This

overall assessment of capabilities and performance

will include each factory’s compliance history,

in addition to other production criteria we use when

deciding which manufacturers will get our business.

GAP INC. VENDOR SUMMIT Nick Cullen

We can’t build our business on our own – no matter

how good our strategies, no matter how hard we

try. This year we are making a deliberate effort to

build partnerships with vendors and to explore how

we can better work together.

Gap Inc.’s Global Vendor Summit, held in San Francisco in early 2005, marked

the first step in the company’s efforts to create deeper relationships with our

vendors. More than 120 people from our top garment manufacturers and textile

mills came together to talk with us about how to work together to address

changes in both the industry and our own supply chain.

The removal of import quotas at the end of 2004 offers new opportunities to work

together more closely and to reward our top performing vendors with higher

volumes and longer-term commitments. Challenges remain in helping vendors

meet our standards for quality and compliance with our COVC. We’ve made it

clear that, in return for our business, we expect more accountability from them

in these areas.

Developing these kinds of close relationships takes time and coordination.

However, we’re confident that, as we provide increased volumes, our vendors

will be able and willing to make investments to improve innovation, quality, and

labor and environmental standards while decreasing costs.

Nick Cullen is Executive Vice President and Chief Supply Chain Officer at Gap Inc.

31Gap Inc. 2004 Social Responsibility Report INTEGRATING LABOR STANDARDS INTO OUR BUSINESS PRACTICES FORGING SUSTAINABLE SOLUTIONS

Given the program’s success, we’ve also partnered

with the National Productivity Council of India to

introduce a similar program in four factories in India

in 2005.

We believe these pilot projects could ultimately help

us articulate a compelling business case that moti-

vates our garment manufacturers and others in the

garment industry to achieve higher levels of compli-

ance. In the meantime learnings from these programs

are providing us with more creative and effective tools

for addressing intractable problems such as exces-

sive overtime and working hour violations in our own

manufacturing base.

“ Social compliance standards are still evolving

and therefore, our policies and procedures should

comply with the most stringent standards available.

Since SA8000 is a standard that helps us to effectively

measure and manage social compliance, we had no

hesitation when Gap Inc. suggested that we consider

certification.” Southeast Asian garment manufacturer

IMPROVING FACTORY OPERATIONSThrough our work with thousands of garment

manufacturers and their factories, we know that poor

management and inefficient operating practices can

take a toll on workers. We’ve also seen some evidence

that the most productive and reliable factories tend to

have fewer compliance problems.

Beginning in 2003, we partnered with the U.K. consul-

tancy Impactt and the Hong Kong Productivity Council

(HKPC) to pilot a productivity program to determine

if initiatives focused on improving factory operations

and productivity would also lead to better working

conditions.

As part of this program, Impactt and HKPC worked

with five factories in China over a nine-month period

to evaluate their existing practices and correct mana-

gerial and operational problems, ranging from poor

communication to inefficient production processes.

The preliminary results, which became available in

August 2004 and are summarized in the table on the

next page, exceeded our expectations.

In the four factories where management was com-

mitted to the initiative, there appeared to be a clear

correlation between productivity and better compliance.

In the fifth, where no improvements were seen, factory

management did not implement the suggested changes,

despite encouragement from its parent corporation.

The most committed participant, Factory A, not only

generated significant annual savings in its opera-

tions by using raw materials more efficiently, but also

reduced worker turnover by more than 50 percent.

Because workers were paid a piece rate, improved

productivity led to a 50 percent increase in their total

monthly pay. Other factories experienced increases

in hourly and monthly pay, as well as reduced cycle

times, more efficient fabric use and lower reject rates.

Based on these results, two of the participating

factories have continued to work with an industrial

engineer from the project, with our VCOs serving

as facilitators. Another participant hired a full-time

employee to manage a similar internal productivity

program. And four new Chinese factories have signed

up to start a similar project in 2005.

REDUCING INEFFICIENCIES IN OUR PURCHASING PRACTICESOne of our goals in 2004 was to determine how

ineffi ciencies in our purchasing practices affect

working conditions in the factories that make our

clothes. Over the past year, we have seen that we

sometimes unwittingly contribute to compliance

issues in a number of ways, ranging from missed

deadlines to last minute design changes.

32 FORGING SUSTAINABLE SOLUTIONS INTEGRATING LABOR STANDARDS INTO OUR BUSINESS PRACTICES

In addition to our work with Impactt, we are partici-

pating in a study to assess the effect better human

resource management systems have on productivity,

product quality, compliance with corporate codes of

conduct and other performance metrics at the factory

level. This work is ongoing, but initial results have

been promising. For example, there does seem to

be a link between improved working conditions and

lower worker turnover. Ultimately, the study will

explore whether training and development programs

can lead to workplace improvements. Evidence of

this nature may help convince garment manufactur-

ers that investing in such management systems is

good for their businesses.

1 Although productivity improved 53 percent in the fi rst four months in this sewing line, it fell drastically in the fi fth month due to more complex orders being produced.2 Management did increase piece rates by about 10 percent, but the increase did not fully compensate for the decrease in overtime hours. Impactt recommended that the factory

continue working to improve its productivity to ensure that workers would be able to earn the same wages in fewer hours.3 During one of the project months, a new style was introduced that was unfamiliar to workers and productivity declined. Without this change, the average wage increase would have

been signifi cantly higher.4 In its fi nal report, HKPC stated “the commitment from the factory was not strong during the course of the project. The project team [in the factory] was rather passive and created the

feeling that there was not [a] genuine need to drive the project in the factory."

SUMMARY OF IMPACTT PROGRAM RESULTS

FACTORY INFO. SCOPE PRODUCTIVITY COMPLIANCE

Factory Location Primary Areas of Focus Effi ciency Worker Turnover Overtime Wages

A Southern China

• Redefi ne role of sewing supervisors to focus on work-ers’ wages and operational effi ciency as well as output and quality

• Better tracking of material

• 99% decrease in number of missing units

• Decreased from 15% to 6.7% • 35% reduction per month

• 50% average increase in monthly total pay

B Southern China

• Reduce production ineffi ciencies

• Better tracking of material

• 20% increase in sewing line effi ciency

• 44% reduction in leftover fabric

• 21% reduction in need for fabric replacement

• Not measured • No change • 14.3% average increase in monthly total pay

C Northern China

• Improve productivity in two sewing lines

• Provide training for sewing supervisors

• 1.5% increase in fi rst sewing line effi ciency1

• 37% increase in second sewing line effi ciency

• Need for re-work decreased from 11% to 6.2%

• Small increase due to reduction in wages, which was linked to fewer overtime hours

• Factory established appraisal sys-tem for supervisors to assess qual-ity and determine training needs

• Reduced by an average of 87 hours in the sewing section and 53 hours in the cutting section per month

• 10% approximate decrease in monthly total pay due to reduction in overtime2

D Southern China

• Manage production for sewing groups

• Reduce cycle time for basic operations

• 7%-42% improvement in cycle times, depending on operation

• 20% reduction in reject rates

• Not measured • No change • 4.4% average increase in monthly total pay3

E4 Southern China

• Manage production for sewing groups

• Improve tracking of material

• No change • Increased in the two sewing lines assessed

• No change • No change

33Gap Inc. 2004 Social Responsibility Report INTEGRATING LABOR STANDARDS INTO OUR BUSINESS PRACTICES FORGING SUSTAINABLE SOLUTIONS

In our industry, alterations to an order are often

made even after an item is in production. Many

garment manufacturers can manage such changes

and deliver on time or with an acceptable delay

without compliance violations. Some, however, may be

unable to complete an order on time without requiring

more hours or higher productivity levels from

factory workers. These circumstances can lead to

violations if management does not act appropriately.

We need to be aware of these potential issues and

manage our business accordingly.

In consultation with our garment manufacturers,

we began working last year to redesign our produc-

tion processes. We are seeking to streamline our

processes and reduce wasted time while still allowing

our teams flexibility to react to trends.

As a result of this work, we have made progress

toward ensuring that our production calendars

consistently reflect real manufacturing deadlines and

that our teams adhere to them. Each of the functions

involved in developing our products – from design

and merchandising to sourcing and production – has

committed to monitor its performance against this

new schedule. In fact, stricter adherence to

production calendars will be built into individual

performance goals.

We’re also beginning to involve manufacturers earlier

in the production cycle so they can better understand

our product design requirements. And we recently

launched three initiatives to increase our understand-

ing of the potential consequences of our sourcing

practices:

• Giving garment manufacturers the opportunity to

evaluate our performance. As part of our inte-

grated sourcing scorecard, garment manufacturers

will be asked to provide feedback on our work-

ing relationships, including how often we change

orders after placing production and whether we are

meeting our stated commitments.

• Increasing awareness among our employees.

A pilot program within Gap brand will use a variety

of training scenarios to help our merchandising and

design teams understand the impact that their

decisions can have at the factory level.

• Studying purchasing practices across the garment

industry. We will take a broader look at purchas-

ing practices across the garment industry through

the ETI working group on purchasing practices, in

which participants will assess and share findings on

different aspects of their production processes. This

work will also be the basis of a report we’re doing

as part of our membership in the Business Leaders

Initiative on Human Rights (BLIHR).

LOOKING AT PURCHASING PRACTICESTrini Leung

In the report Trading Away Our Rights (2004), Oxfam produced evidence to show

that clothing retailers’ demands for faster, more flexible and cheaper produc-

tion in their supply chains undermine the very labor standards they claim to be

promoting. Ethical codes of conduct alone cannot alleviate the endemic problem

of precarious employment so long as retailers fail to address the part they play

in causing poor working conditions.

We encourage Gap Inc. and other retailers to get the clothing industry to tackle

the problem of abusive conditions and bring about meaningful improvements so

that workers and women producing their goods can enjoy decent work and

livelihoods. Incorporating commitments to workers’ rights and poverty allevia-

tion into their sourcing and buying strategies is critical to achieving this. For

example, improving critical path management of their supply chain and building

long-term partnerships with suppliers can avert the problem of excessive

overtime and insecure employment among garment workers.

The U.K.-based Ethical Trading Initiative working group on purchasing practices

could be a most constructive forum to develop a model of change that engages

a wide group of companies, unions and NGOs. Clothing retailers need to meet

the challenges of committing the time, resources and openness to this initiative

and identify solutions so that precarious employment among clothing workers

can be alleviated.

Trini Leung is a policy adviser for Oxfam in Great Britain.

Through better monitoring and the integration of

labor standards into our supply chain operations, we

are beginning to address some of the ways that gar-

ment manufacturers and buyers contribute to poor

working conditions.

But as we’ve discussed, the causes of poor working

conditions are much broader than just shortsighted

factory management or inefficient purchasing prac-

tices. Problems in factories are often a reflection of

external issues far beyond the immediate control of

any single company or management team.

At the industry level, decentralization and

inconsistent labor standards put a strain on limited

enforcement resources and create incentives for

garment manufacturers to take the easy way out.

Photo:Gap Inc. Vendor Compliance Managers participate in an audit led by Verité in Bangkok, Thailand.

Meaningful change requires not

only a firm commitment and

sustained effort, but also scalable,

collaborative strategies that

leverage the influence, resources

and capabilities of stakeholders

from all sectors.

Progress Through Partnerships

34 FORGING SUSTAINABLE SOLUTIONS PROGRESS THROUGH PARTNERSHIPS

35Gap Inc. 2004 Social Responsibility Report

At the country level, weak labor laws, erratic

or non-existent enforcement, and economic

underdevelopment deny garment workers the legal

recourse and alternative employment opportunities

that workers in other countries often rely on for relief

from undesirable working conditions.

And at the international level, the expiration of quotas

and rising expectations among consumers are

creating new competitive pressures and threatening

the livelihood of thousands of people.

Having a significant impact in such an environment

can be difficult. As we learned from our experience in

the Global Alliance, which dissolved last year, mean-

ingful change requires not only a firm commitment

and sustained effort, but also scalable, collaborative

strategies that leverage the influence, resources and

capabilities of stakeholders from all sectors.

INCREASING OUR EMPHASIS ON SCALABLE PROGRAMSAs the maps on pages 6 and 7 illustrate, we are

currently involved in a variety of initiatives in areas

ranging from worker education and vendor ownership

to independent monitoring, public policy and

productivity enhancement.

In the past, we have selected projects based largely

on a combination of opportunity, relationships and

need. We have cast our net wide to learn how to

partner with external organizations, how to maximize

benefits for workers and how to bring about lasting

change. In short, we have explored and experimented.

This year, we are begining to take a more focused,

strategic approach. Small projects that enable us

to innovate, respond quickly to urgent issues and

establish new partnerships will continue to be an

important part of our work. But we also want to place

more emphasis on broader-scale initiatives that

target systemic issues and have the potential to help

drive industry-wide change.

THE IMPORTANCE OF CROSS-SECTOR COLLABORATIONMary Robinson

One of the most promising developments in

recent years is that more and more business

leaders are recognizing that they have an

important part to play in fostering greater

respect for human rights, labor rights and

the environment around the world.

The goal is not to “privatize” management of these issues. We can’t expect, nor

should we wish, that companies take on such a challenge alone. I have always

said that primary responsibility in such matters rests with governments.

I also believe, however, that no other societal factor has the potential to

transform the way people live and work more than the private sector. For this

reason and others, business leaders must be dedicated participants in broader

efforts to safeguard our planet and secure a life of dignity for all people.

Regulation can help minimize abuses and enforce compliance with minimum

norms. But if universal principles in the areas of human rights, labor rights and

the environment are to become an integral part of business strategies and day-

to-day operations, regulation alone won’t be sufficient. It must be coupled with

a concerted effort to stimulate good practices, to be innovative and to provide

leadership. Together, government, civil society and the private sector must build

a framework in which doing the right thing also makes good business sense.

Mary Robinson, the first female president of Ireland (1990-1997) and, more recently, United Nations High Commissioner for Human Rights (1997-2002), has spent most of her life as a human rights advocate. In her current capacities as founder of Realizing Rights: The Ethical Globalization Initiative and as Honorary Chair of the Business Leaders Initiative on Human Rights (BLIHR), Mrs. Robinson is working with member companies, including Gap Inc., to ensure that respect for human rights is built into their business practices.

PROGRESS THROUGH PARTNERSHIPS FORGING SUSTAINABLE SOLUTIONS

To do this, we are strengthening our internal resources

and looking for ways to amplify the impact of our efforts.

We have reorganized our team to achieve better

regional alignment. We have people around the world

focused on global partnerships, the environment,

health and safety, and global operations. And we

are broadening the skills and responsibilities of our

monitoring organization through training on

stakeholder engagement and the management of

local initiatives.

We will also strive to move our most promising ideas

from the pilot level to the program level. We will seek

to create a timeline that encourages the concurrent

development of complementary projects. And we will

continue to participate actively in multi-stakeholder

and multi-lateral frameworks that promote collabor-

ative and standardized approaches to improving labor

standards across our industry.

CONTINUING COMMITMENT TO STAKEHOLDER ENGAGEMENTOur Global Partnerships team, which was founded in

2002, concentrates on promoting collaboration and

cultivating the extensive stakeholder relationships

critical to forging scalable and sustainable solutions.

The team’s ongoing outreach to leaders in govern-

ment, civil society, trade unions and academia

enriches our thinking, provides us with opportunities

to get involved in local and regional projects, and

makes it possible for us to participate constructively

in multi-stakeholder initiatives at the industry and

international levels.

Last year, we invited stakeholders from around the

world to join us for one of two full-day sessions dedi-

cated to exploring emerging issues in the garment

industry. More than 40 leaders and experts attended

the meetings, which were held in Washington, D.C.

and London.

While the sessions were not designed to craft

solutions, they helped deepen our understanding of

the industry’s changing landscape and the differing

views and priorities of our stakeholders. Participants

raised a wide variety of topics ranging from

sanitation to AIDS awareness, but three dominant

themes emerged from our discussions:

Greater Transparency — Participants from all

sectors stressed the continued need for robust

reporting that uses new tools and channels to

increase transparency into factory conditions, as

well as corporate practices and policies. Several

stakeholders also believe that retailers could help

them defend the rights of workers more effectively

by disclosing the names and locations of the

factories that produce their products.

More Active Involvement in Public Policy —

Stakeholders in the United States were particularly

eager to see global brands take a more active role

in shaping legislation and trade policies that support

labor standards and promote economic growth in

less-developed countries.

Collaborative Approach to Quota Expiration and

Other Challenges — Many stakeholders stressed the

need for a collaborative approach to mitigating the

near-term economic consequences associated with

the expiration of quota, as well as other challenges

facing the garment industry.

We can’t promise to take action on all of these

suggestions, particularly in the immediate future.

This feedback, however, has helped us reassess

certain aspects of our approach, and we are

incorporating it as we develop our strategy for the

coming years.

36 FORGING SUSTAINABLE SOLUTIONS PROGRESS THROUGH PARTNERSHIPS

37Gap Inc. 2004 Social Responsibility Report PROGRESS THROUGH PARTNERSHIPS FORGING SUSTAINABLE SOLUTIONS

ONGOING PARTICIPATION IN MULTI-STAKEHOLDER INITIATIVES (MSIs)Our membership in MSIs such as the Ethical Trading

Initiative (ETI), Social Accountability International (SAI)

and the Business Leaders Initiative for Human Rights

(BLIHR) enables us to participate in efforts to address

problems that are especially challenging or transcend

individual sourcing markets. In this section, we

discuss how we are working with MSIs to address

three of our industry’s most difficult challenges:

developing a uniform code of conduct and

consistent methods of enforcement, mitigating the

consequences of post-quota consolidation, and

protecting homeworkers.

Developing a Uniform Code and More Effective Enforcement MechanismsIn last year’s report, we stated that we would support

a uniform code that is at least as stringent as our

current requirements and consistent with the ILO's

core labor standards.

We continue to believe that a uniform code – and

more efficient and consistent methods of enforcement

– would promote faster and more sustainable change

across the industry. Garment manufacturers would

make more progress if the playing field were level,

and they had an incentive to invest in a single set of

requirements. Instead of spending money on dozens

of different audits in the same facility, buyers could

leverage consolidated third-party monitoring services

and concentrate more on other issues like remedia-

tion, capacity building and community development.

Unfortunately, developing a code and corresponding

enforcement processes that are acceptable to

everyone has not proven to be easy.

Our highly fragmented industry already has many

codes. Most organizations and companies have

historically been reluctant to adopt standards devel-

oped by others for reasons that include professional

rivalry, genuine disagreement over content and the

lack of concrete incentives to change.

GRI APPAREL AND FOOTWEAR SECTOR WORKING GROUP

In 2004, we agreed to participate in the Global

Reporting Initiative's (GRI) working group to develop

a GRI Apparel and Footwear Sector Supplement.

This supplement, which will complement the

general GRI reporting framework, will cover issues

specific to the apparel and footwear industries.

It will be drafted by a multi-stakeholder group,

working in conjunction with the GRI, over a

12-month period in 2005-06. The group includes

approximately 20 members representing a

geographically diverse mix of major brands,

leading manufacturers, civil society organizations,

trade unions and investors.

We see this work as an important step toward

greater standardization of reporting in the apparel

industry. The GRI’s multi-stakeholder approach will

bring together a variety of perspectives, which will

help ensure spirited dialogue and debate on labor

standards and other key industry challenges.

We appreciate the opportunity to participate in the

development of a common set of indicators that

companies in our industry can use to measure and

report progress. Since the group’s work will be

based on consensus, we hope that the final product

will carry a high level of credibility and acceptance

among a diverse set of users.

The GRI working group will operate in a transparent

manner by posting draft materials on the Internet

and inviting public comment on the final working

draft. The output of the group will be published

by GRI as Pilot Version 1.0 of the GRI Apparel and

Footwear Sector Supplement, which will be subject

to further testing.

As we discuss earlier in this report, we don’t

anticipate an immediate migration of all textile and

apparel production to a handful of countries. There is

strategic value in maintaining a diversified sourcing

base, and new safeguard measures and tariff policies

are likely to slow consolidation in the near-term.

Still, we are already seeing consolidation in the

industry’s manufacturing base, and we expect this

trend to continue over the next several years.

To help address issues associated with consolidation,

we were one of the first companies to join the MFA

Forum, a multi-stakeholder effort that has developed

a broad set of recommendations to help governments,

international institutions, suppliers, NGOs, trade

unions and retailers manage the transition to a

post-quota environment in a responsible fashion.

As a Forum member, we are committed to

exploring alternatives before moving our production.

Where possible, we will seek to work with national

governments to help them improve labor standards

and increase competitiveness. We will monitor our

manufacturers for compliance with national laws

pertaining to factory closures. And when it does

become necessary to exit a country, we will seek to

do so in a manner that respects applicable laws,

the rights of workers and the needs of affected

communities.

Our Global Compliance management team will be

working with our sourcing teams in 2005 to explore

ways to integrate these practices into our supply

chain policies and procedures. We are also reaching

out to garment manufacturers to help them under-

stand the importance of social considerations when

determining where to operate factories.

Protecting HomeworkersFrom an economic and humanitarian perspective,

one of the most complex challenges in our industry

is finding an effective way to protect the rights and

interests of some of the world’s most vulnerable

garment workers – the “invisible” people who work

on a project basis from their homes.

38 FORGING SUSTAINABLE SOLUTIONS PROGRESS THROUGH PARTNERSHIPS

Still, we should be able to reach common ground,

particularly as respected groups such as the Clean

Clothes Campaign (CCC), ETI, the Fair Labor Associa-

tion (FLA), the Fair Wear Foundation (FWF), SAI and

the Worker Rights Consortium (WRC) continue to

develop viable alternatives to proprietary codes.

Last year, these six multi-stakeholder organizations

came together in Turkey to launch an effort known

as the Joint Initiative on Corporate Accountability and

Workers’ Rights. Over the next two-and-a-half years,

this initiative will develop a common code and work

with participating garment manufacturers – including

one or more that produce our apparel – to develop a

common code and consistent methods of implemen-

tation. Given the large corporate memberships of the

multi-stakeholder organizations involved, we believe

this is one of our best opportunities to gain industry-

wide buy-in on a global solution. We hope that many

buyers and garment manufacturers will choose to

adopt and implement the final recommendations.

As an interim step, and in light of our membership in

ETI and SAI, we are reviewing our own Code of Vendor

Conduct against the ETI Base Code and SA8000 stan-

dard in 2005.

Managing the Transition to a Post-Quota EnvironmentOver the past several months, we have been working

to develop a better understanding of the likely conse-

quences of post-quota consolidation and what can be

done to help mitigate negative effects.

39Gap Inc. 2004 Social Responsibility Report PROGRESS THROUGH PARTNERSHIPS FORGING SUSTAINABLE SOLUTIONS

MFA FORUM: ADDRESSING THE CHALLENGES OF QUOTA EXPIRATIONNeil Kearney and Lynda Yanz

In a unique collaboration, a number of brands and

retailers, including Gap Inc., international

institutions, trade unions and NGOs – the “MFA

Forum”– have joined to address the challenges

arising from trade liberalization in textiles and

clothing as a result of the ending of the Multi-

Fibre Arrangement (MFA).

The MFA Forum recognizes that failure to handle, responsibly, the transition

to a post-MFA world carries several dangers, including the negative impact on

workers of losing critical employment and earnings potential and damage to

the reputation of business.

The Forum’s Collaborative Framework for Guiding Post-MFA Action

proposes a wide spectrum of actions at both the national and international

levels by all actors to ensure equitable development and decent work in the

post-MFA world. This guide to dealing with MFA impacts is particularly

important for brands and retailers reviewing sourcing strategies.

Brands and retailers must promote decent work by maintaining their current

country supply base; when consolidating in-country, ensuring that displaced

workers are given fi rst opportunity for re-employment in the consolidated

supply chain; and sourcing only from countries that respect core labor stan-

dards and suppliers who provide decent work.

Putting all of this into practical action will be a real test of corporate social

responsibility on the part of the brands and retailers. We welcome Gap’s

involvement in this important initiative.

Neil Kearney and Lynda Yanz were among the founders of the MFA Forum. Mr. Kearney is General Secretary, International Textile, Garment & Leather Workers’ Federation (ITGLWF). Ms. Yanz is Coordinator, Maquila Solidarity Network (MSN).

“Homeworkers,” as they are known, perform

services ranging from basic stitching and beading to

elaborate embroidery and basket weaving. They have

been major contributors to the garment industry, and

many other industries, for decades.

For a variety of social, cultural and economic reasons,

most homeworkers do not work outside their homes

or villages. They rely on independent contractors and

sub-contractors to bring work to them, and generally

have little or no knowledge of the factory or buyer for

which they are making products. Because they work

alone and often in remote locations, homeworkers

may enjoy even fewer protections and benefi ts than

their counterparts who are employed in factories.

In 2004, we joined ETI’s multi-stakeholder working

group to begin to address the challenge of protecting

these workers. With the cooperation of 13 garment

manufacturers who produce apparel for ETI’s mem-

bers, an India-based ETI research team conducted

extensive interviews with homeworkers, contractors,

sub-contractors and garment manufacturers, as well

as local government, trade union and NGO represen-

tatives. The group delivered its fi rst set of research

fi ndings in October 2004.

We recognize that working at home is a critical

source of income for many people and that we must

be careful to ensure that our efforts are balanced

and do not result in an unintended loss of jobs. The

goal of this work is to ensure that homeworkers are

treated fairly. Over the course of the next year, we will

be working with our ETI partners to build upon these

fi ndings and develop a common set of guidelines to

focus our efforts in this area.

EXPANDING OUR PUBLIC POLICY EFFORTSWe recognize that thoughtful public policy advocacy

is an important part of our broader efforts to improve

labor standards. As mentioned earlier, many stake-

holders have told us that they’d like to see us deepen

our public policy work.

We agree that the debate over challenges and dispari-

ties due to globalization often overlooks the critical

role of the private sector. Although we are still in the

process of developing our strategy on public policy

outreach, we believe that companies like Gap Inc. can

work with government, trade unions, civil society and

opinion leaders to develop collaborative approaches

and institutional mechanisms to further the public in-

terest and benefit business. We are exploring various

projects and partnerships to help fill governance gaps

and build greater capacity in transitional economies.

We also believe that, beyond specific initiatives in

individual countries, the business community should

come together to have a more significant collective

impact. To this end, we played a role in the formation

of the Business Coalition for Capacity Building

(BCCB) in 2003.

A voluntary, cross-industry effort, the BCCB provides

a collaborative platform through which companies can

work with civil society, government and multilateral

lending institutions to address shared concerns and

develop innovative approaches to capacity building.

The BCCB is focused not only on labor standards, but

also on customs and environmental compliance, pub-

lic health, enforcement of intellectual property rights,

supply chain security, and workforce training and

education. We are joined in this endeavor by several

major U.S. companies. We hope that still other com-

panies will see the benefit of participating, and that

together we can make a greater difference in sharing

the benefits and responsibilities of global commerce.

THE ROAD AHEADMeasuring progress at the country, regional or

industry level is even more challenging than track-

ing improvement in individual factories. Still, we’ve

seen encouraging signs that measurable change on a

broad scale is possible through collaboration.

There is, perhaps, no better example of this than

Cambodia. For several years, the government, gar-

ment manufacturers and unions there have actively

sought opportunities to partner with buyers and civil

society as part of an ongoing effort to improve labor

standards and build a stable foundation for the con-

tinued growth of the Cambodian garment industry.

40 FORGING SUSTAINABLE SOLUTIONS PROGRESS THROUGH PARTNERSHIPS

CENTRAL AMERICA

Central America’s proximity to our United States

and Canadian operations facilitates communication,

reduces transportation costs and accelerates speed

to market, which enables us to respond quickly to

fluctuations in demand and shifts in trends.

To remain competitive in the post-quota era,

however, manufacturers in Central America will

have to offset higher operating costs with innova-

tion, greater efficiency and better compliance with

labor laws and standards.

To help Central America meet these challenges

and grow as a strategic sourcing market, we are

actively involved in two programs called Continu-

ous Improvement in the Guatemalan Workplace

(CIMGUAW) and Continuous Improvement in the

Central American Workplace (CIMCAW). The pro-

grams were launched in partnership with USAID,

Development Alternatives Inc. (DAI), Timberland,

SAI, the Commission for the Verification of Codes

of Conduct (COVERCO) and the International Textile,

Garment & Leather Workers’ Federation (ITGLWF).

CIMGUAW and CIMCAW will provide training on

labor standards to factory managers, supervisors,

workers and monitors in Guatemala and other

Central American countries. We hope to see the

programs expand in the coming years to address a

larger audience and broader range of topics, such

as factory monitoring, additional stakeholder

engagement and remediation mechanisms.

41Gap Inc. 2004 Social Responsibility Report PROGRESS THROUGH PARTNERSHIPS FORGING SUSTAINABLE SOLUTIONS

CHINA

In March 2004, we joined with several other

brands to begin talking with the China Association

of Enterprises with Foreign Investment (CAEFI)

– an affiliated body of the Chinese Ministry of

Commerce – about opportunities to improve

enforcement of China’s labor laws at the provincial

and local levels.

Today, we are partnering with CAEFI and several

companies – including adidas-Salomon, IKEA, Nike

and Reebok – to formalize a subcommittee known

as the Better Workplace Foundation, which will be

open for other companies to join and continue this

dialogue on an ongoing basis. The group will also

work with provincial labor departments to help

factory owners and management understand how

better labor standards can help improve the

productivity and profitability of Chinese enterprises.

Photo:Gap Inc. and the IFC/MPDF launch a new managerial skills training program in Cambodia.

Cambodia’s government sent a strong signal of its

commitment to cross-sector collaboration in 1999,

when it signed a bilateral trade agreement with the

United States that, among other provisions, created

an extensive monitoring program involving the ILO.

Since then, we have participated in a number of

collaborative initiatives in Cambodia. We continue to

support the ILO’s monitoring and remediation efforts,

which aim to improve working conditions and boost

productivity in Cambodian factories through more

worker involvement. In 2004, we provided funding to

CARE for a factory-based health program. And most

recently, we joined with the International Finance

Corporation’s Mekong Private Sector Development

Facility (IFC/MPDF) to launch Supervisory Skills

Capacity Building (SSCB), a new managerial skills

training program for 650 factory supervisors.

Challenges remain in Cambodia. But we were pleased

by the ILO's decision earlier this year to continue

efforts there and by a recent World Bank survey

showing that Cambodia's commitment to labor

standards is helping it compete in the international

apparel market.

We believe Cambodia’s inclusive, voluntary approach

to collaboration serves as a model for other countries,

and we are committed to working with stakeholders

from all sectors to help drive similar efforts across

the garment industry.

employees

One of the things we’ve learned as we listen to our

more than 150,000 employees around the world is

that our people want to work for a company that’s

socially responsible. Our commitment to social re-

sponsibility, as described in this report, has become

an integral part of who we are at Gap Inc. As one

employee said, “It’s a wonderful feeling to be part of

an organization that believes in doing what’s right.”

We know that the continued growth of our company

depends on such passion, and on the hard work of our

employees. We create value for our shareholders by

providing a fantastic customer experience and great

products. And it takes highly satisfied and engaged

employees to exceed our customers’ expectations.

42 EMPLOYEES

That’s why we are committed to continually improving

the employee experience. We want to be a company

where people can stretch their capabilities, grow as we

grow and build their careers in an environment that

reflects and respects their values. In this challenging

and fast-paced industry, we place a priority on listening

to our employees and providing a supportive, inspiring

environment in which great people can flourish.

AN ETHICAL AND INCLUSIVE WORKPLACE Gap Inc. has been successful by having a vibrant

open-door process where employees can express

concerns without fear, by working collaboratively

with employees to solve issues that arise, and by

ensuring we work together in ways that are

consistent with our values.

The Key to Our SuccessWe want to be a company where people can stretch their capabilities,

grow as we grow and build their careers.

43Gap Inc. 2004 Social Responsibility Report

We are dedicated to creating a workplace in which

the rights, the needs and unique contributions of

every employee are consistently respected. Just as

we hold approved garment manufacturers account-

able for complying with all applicable laws and

treating workers with dignity and respect, we hold

ourselves accountable as well. Our Code of

Business Conduct helps ensure that we do business

in a responsible way that is consistent with our

values. We have absolute respect for our employees’

rights, including freedom of association and providing

working conditions about which we are proud. We are

committed to an environment free from harassment

and discrimination. And we are continuing to evolve

our processes and communications to ensure a

positive work environment and a clear understanding

of our employment philosophy.

We also recognize that employees have a critical

role to play in creating an ethical and inclusive

workplace. As such, we welcome and encourage our

employees to be fully informed about our programs

and policies, and their options and rights as

employees. There are a number of avenues we

provide to ensure our employees are heard.

Under our open-door policy, employees are encour-

aged to raise questions, concerns or suggestions, and

to reach out to managers, supervisors and our Human

Resources team as needed. In addition, we have a

24-hour confidential hotline that employees – and

members of the public – can call anonymously if they

suspect a violation of our Code of Business Conduct.

In the United States, Canada and Puerto Rico the toll-

free number is (866) Gap-Code. Information on how to

reach the hotline from other locations is provided in

the Corporate Compliance section of www.gapinc.com.

We also recognize the need for ongoing training for

managers and employees to ensure all employees

adhere to our Code of Business Conduct. To that end,

this year, we introduced a required training program

called the “Principles of Integrity” to help our employ-

ees understand how our Code applies to their work.

EMPLOYEES

Just as we serve a diverse base of customers

worldwide, we want to reflect and include a broad

range of backgrounds, skills and talents at Gap Inc.

To us, diversity means respecting visible differences of

age, race, gender, nationality, and physical ability, as

well as invisible differences such as culture, religion,

marital status, sexual orientation, experience and

perspective.

In 2004, a council of senior executives throughout the

company identified several steps to further increase

diversity, including the creation of a Department of

Diversity and Inclusion. And this year we are proud

to have been honored by the National Association for

Female Executives as one of the “Top 30 Companies

for Executive Women.”

The quality of our work experience depends on the

quality of our combined efforts to create a great work

environment. By focusing on treating each other with

respect and approaching our work relationships with

integrity and open-mindedness, we’ll continue to be

successful in maintaining Gap Inc. as a great place

to work.

ATTRACTING AND RETAINING TALENTED PEOPLEWe want people to see Gap Inc. as a place to build

their careers. That’s why we constantly focus on

improving the overall employee experience.

“ I really appreciate the company’s efforts in...making

me feel heard, supporting me, protecting me, and reas-

suring me…. To know that my voice did not go unheard

and that Gap Inc. will do what’s right is why I continue

to appreciate being a part of the Gap family.” Feedback from a Gap Inc. employee who raised concerns about managers at

higher levels under the Code of Business Conduct

Key elements include:

• Competitive compensation that is linked to

performance goals and reflects each employee’s

contribution to Gap Inc.’s success. We conduct an

ongoing analysis of compensation across the indus-

try and among other companies to ensure that Gap

Inc. continues to attract the best employees and

reward them competitively.

• Benefits tailored to the needs and lifestyles of our

employees. In addition to highly competitive health

and retirement benefits, we are proud to offer a

wide variety of desirable lifestyle benefits, including

generous paid-time-off and family leave policies,

merchandise discounts of up to 50 percent when

employees shop in our stores, tuition reimburse-

ment programs and discounts on personal

computers. Through Gap Foundation, we also

provide matching gift programs that complement

employee charitable contributions for employees

in North America, the U.K., and Hong Kong. (See

the “Community Involvement” section for additional

information about Gap Foundation.)

A new global recognition program, the Founders’

Award, honors the philanthropic spirit of Gap Inc.’s

founders, Doris and Don Fisher. The award will

recognize Gap Inc. employees who are already

making a difference in their community – and give

them the opportunity to create their own lasting

philanthropic legacy. The award winner will receive

up to 80 hours of paid time to work with his or her

community partner – a nonprofit or non-govern-

mental organization that supports a cause for which

they’ve been involved. This organization will also

receive a Gap Inc. grant of up to $50,000.

Our aim is to increase satisfaction and retention rates

among our teams, and we work hard to provide the

training and development opportunities to help employ-

ees to be successful in their current roles and to take

on new roles in other brands and divisions within the

company. One of our goals is to assist store employees

who’d like to pursue career opportunities throughout

our company, and we seek a healthy mix of experiences

and perspectives as we build our teams. Our interna-

tional initiatives and the upcoming launch of our fourth

brand, Forth & Towne, create even more opportunities

for our employees, and our job is to recruit, develop

and promote employees across Gap Inc.

Enabling people to realize their full potential also re-

quires an open, honest, two-way flow of communication.

We are committed to understanding employee issues

from a variety of diverse perspectives, and we encourage

an open dialogue through formal and informal channels,

including surveys, focus groups and our open-door policy.

Through our “Pass It On” surveys, for example, we re-

ceive quarterly feedback from store managers. Our “Your

Voice” survey allows employees to provide anonymous

feedback and comments at any time to senior manage-

ment. And last year, we piloted a survey with a group of

employees, which we plan to expand to all employees.

A HOLISTIC APPROACH TO REWARDS Retaining, motivating and empowering employees

also requires the right mix of rewards, tailored to meet

the unique needs of people at different levels and at

different career and life stages.

We’ve always viewed compensation as more than

simply salary and benefits. In 2004, we launched

Rewards@Gap Inc., a program that brings together all

the ways we reward and recognize our employees.

44 EMPLOYEES

45Gap Inc. 2004 Social Responsibility Report

• Creating an environment that energizes people

and encourages success. Our employees will drive

our continued success, and we’re working hard

to ensure that our culture supports and rewards

the behaviors that represent what our company

believes in — our Purpose, Values, and Behaviors,

which embody a collective spirit of exploration,

creativity and teamwork based on integrity, respect

and balance. We hold our leaders accountable for

taking actions that are consistent with our values,

and for ensuring that their teams understand our

expectations. In addition to recognition programs

in our divisions and brands, we recently began

rolling out our Purpose, Values, and Behaviors—an

expansive initiative to share our values with all

employees. We reached 35,000 employees in

2004, and are scheduled to reach all employees

worldwide by the end of 2005.

THE ROAD AHEADWe are proud of what we’ve accomplished in our

first 35 years, but we know more work lies ahead. As

we move forward, we will continue working closely

with our employees to create the kind of environ-

ment where they can build their careers and help us

achieve exceptional results.

EMPLOYEES

OUR PURPOSE, VALUES AND BEHAVIORS

2004 marked our 35th birthday as a company. It

also marked the start of a new cultural framework

for the company. We call this framework our

Purpose, Values and Behaviors (PVB).

PVB is an articulation of why we do what we

do, our shared values, how we want to be known as

a company, and how we define our behaviors – the

actions we must take and the talents we must

apply to our work.

The framework starts with a common purpose:

“Every day, Gap Inc. honors the original reason for

founding this company. We’re passionate that you

be you. We make it easy for you to express your

personal style throughout your life.”

Supporting our purpose are the values and

behaviors that define who we are and how we work.

We value integrity, respect, open-mindedness,

quality, and balance, and we strive to behave

in ways that enable us to explore, create, and

exceed … together.

Of course, simply articulating the purpose, values,

and behaviors of a company doesn’t change things

overnight. We started the process of introducing

our PVB framework across the entire company late

last year, and we’re continuing throughout 2005.

It’s a global undertaking requiring both training and

leadership. Our leaders will be held accountable for

helping their employees live according to our

values and for modeling our behaviors each and

every day.

46 COMMUNITY INVOLVEMENT

Photo: Heather Schafer volunteers at an event to give away Gap jackets to children. When Denver-area stores were closed for renovations, employees volunteered with local nonprofits while continuing to receive pay.

communityinvolvement “ I serve as a ‘job coach’ to help prepare teenagers

for the world of work. The youth are ready to embrace

new opportunities and responsibilities...I find the

experience so rewarding that I always wonder who

gets more out of it – the teens or me!” Chase Perrett, Human Resources Supervisor, Old Navy

Since the Gap Foundation was established in 1977,

Gap Inc.’s community outreach has taken many

forms, including employee volunteer efforts, Gap

Foundation grants, in-kind donations and consumer

promotions.

In 2004, we made $33 million in cash and in-kind

donations. We also stepped back to reassess the way

we serve our communities. While financial gifts and

product donations will remain an important part of

our outreach efforts, we realize that the contributions

we make through the time, talent and passion of our

employees can be even more valuable.

With that in mind, we’re now reorganizing and

strengthening our volunteer program and putting more

resources behind the community projects in which our

store and corporate employees are involved. Our pri-

mary focus, both for funding and for volunteerism, is

underserved youth, but we also encourage employees

to pursue the causes and issues that have the great-

est meaning to them as individuals.

VOLUNTEERING AROUND THE WORLDIn 2004, Gap Inc. employees spent approximately

73,000 hours volunteering. Below are descriptions of

a few of the projects in which they participated. Ad-

ditional examples can be found on www.gapinc.com.

Stollery Children’s Hospital (Edmonton, AB, Canada)

A team of employees has made an ongoing commit-

ment to serve Stollery’s young patients and their fami-

lies. Stollery provides complex and specialized services

such as cardiac surgery and organ transplants. Em-

ployees visit with patients, provide respite for caregiv-

ers and volunteer at Stollery’s fundraising events.

Breakthrough Collaborative (Hong Kong) — Mentors

in our Hong Kong sourcing office spend two weekends

per month helping motivated, low-income students

improve their English skills.

Colorado in Action (Denver, CO) — For ten weeks in

early 2005, a number of Gap stores in Colorado were

closed for renovations. During this period, store

employees remained on company payroll and divided

their time between training and volunteering with

nonprofits in the area. More than 60 community or-

ganizations hosted Gap employees, who volunteered

nearly 10,000 hours.

The Door (New York, NY) — During the academic

year, employees from 30 Old Navy, Gap and Banana

Republic stores taught a job readiness course to

low-income teenagers affiliated with The Door, an

educational and social services agency that serves

7,500 adolescents per year.

—

47Gap Inc. 2004 Social Responsibility Report COMMUNITY INVOLVEMENT

We were pleased to see increases in employee

participation both in volunteerism and fi nancial

contributions from 2003 to 2004 and look forward

to even higher numbers in 2005.

SOUTH ASIA TSUNAMI RELIEF EFFORTS

After the devastating earthquake and tsunami in

South Asia, Gap Foundation double-matched

employee contributions to designated agencies

with a gift of $1.3 million. Gap Foundation pledged

an additional $1 million to support immediate

relief and longer-term recovery in the impacted

communities, bringing the total contribution to $2.3

million. To encourage contributions from our

customers, our web sites featured a page where

customers could learn more about the disaster and

how they could contribute to relief efforts. In

addition, Gap collaborated with Sarah Jessica

Parker to create and sell a t-shirt with the message,

“Send love around the world.” The proceeds from

t-shirt sales, which totaled $100,000, were donated

to UNICEF for tsunami recovery efforts.

RECOGNIZING VOLUNTEERSTo encourage and support volunteers and to

acknowledge that employees contribute in different

ways, our Gap Giving program matches employee

contributions of both time and money. We also

recognize employees who have demonstrated a

commitment to their communities through two

unique programs:

Community Corps takes teams of employees on

homebuilding trips with Habitat for Humanity. To date,

more than 300 employees have participated in these

trips, and we’ve built 30 homes in the United States

and Central America. Gap Foundation covers all trip

costs, including all expenses associated with building

the homes.

The Founders’ Award, as described on page 44, builds

upon the philanthropic legacy of company founders

Doris and Don Fisher and recognizes employee com-

mitment and partnership with a particular nonprofi t

agency or non-governmental organization.

CONSUMER PROMOTIONSThroughout the year, our brands partner with

charities and promote their causes through in-store

customer promotions. During the 2004 holiday

season, Gap introduced “Share the Warmth,” a

campaign featuring the GapKids character Brannan

the Bear. In November and December, a limited

edition Brannan the Bear clothed in a Gap Warmest

Jacket was available for sale online and in Gap,

GapKids and babyGap stores throughout North

America. 100 percent of proceeds went directly to

providing more than 73,000 Gap Warmest Jackets to

children in need.

“ Thanks to Community Corps, 2004 was a year that

changed me forever. I helped build a home for a family

in need. The homeowner told us he and his family were

so blessed but I was thinking it was all of us who were

truly blessed to have been part of such a

wonderful experience.” Kathleen Clarke, Customer Relations Specialist, Gap Inc.

Financial 8,105 8,822 $1,707,319 $2,752,972Donations employees employees 61% increase

Volunteer 3,882 7,766 21,965 hrs. 72,937 hrs.Hours employees employees 232% increase

2003

Par

ticipati

on

2004

Par

ticipati

on

Total

Emplo

yee

Con

tribu

tions 2

003

Total

Emplo

yee

Con

tribu

tions 2

004

environment, health and safety

We understand that our business affects the

environment, as well as the health and safety of our

employees and customers. In addition to maintaining

compliance with applicable laws and regulations,

our teams are constantly exploring ways to reduce

our impact on the environment, keep our workplaces

safe and ensure that our products can be enjoyed

with confidence.

ENVIRONMENTIn 1999, we began implementing an environmental

management system in facilities we own and operate

to help ensure that we are consistently in compliance

with local, state and federal regulations.

We have always believed, however, that our

responsibilities extend beyond legal requirements.

We are currently working on a strategic plan to

develop more environmentally friendly ways of doing

business. As part of this effort, last year we hired

a consulting firm, CH2M HILL, to help us conduct a

high-level assessment of our environmental impact at

each stage of our product lifecycle – from raw

materials to disposal of garments.

48 ENVIRONMENT, HEALTH AND SAFETY

In addition to maintaining compliance with

applicable laws and regulations, we are

constantly exploring ways to reduce our

environmental impact, keep our workplaces

safe and ensure that our products can be

enjoyed with confidence.

Photo:A worker in an Indian water treatment facility ensures the plant’s wastewater sys-tem is operating properly.

49Gap Inc. 2004 Social Responsibility Report

This assessment, which is summarized in the

illustration below, provided us with two important

insights. First, it confirmed that we are already

concentrating, as we should be, on the areas where

we have the greatest opportunities to make a

difference: packaging use and disposal, energy

consumption, and waste and recycling. Second, it

highlighted some of the serious sustainability

challenges facing the garment industry as a whole.

Going forward, we will continue to focus on key

areas where we have direct control, while also looking

for opportunities to work with industry partners on

problems – such as water quality – that require

collaborative solutions. The following examples

illustrate some of the progress we made in 2004.

Packaging Use and DisposalAs a service to our customers, Old Navy stores began

selling garments on size-specific hangers in 2003.

Last year, after realizing that fewer customers than

expected were taking hangers home, we began

exploring ways to recycle or reuse them. We found

that by redesigning the hangers, we could make them

easier to recycle. We are now changing their

composition and plan to pilot a recycling program

later this year.

We are also using our scale to encourage non-mer-

chandise vendors to adopt more environmentally

sound practices. In 2004, our brands began working

with our corporate sourcing team to leverage our

buying power when purchasing print services for

marketing materials. In choosing vendors, we not only

consider price, but also look at factors such as the use

of recycled content, the type of bleach and dyes used,

and the vendor’s support for sustainable forestry. By

working with vendors who share our commitment in

these areas, we hope to improve the environmental

attributes of the paper we purchase over time.

Energy ConsumptionWe continue to reduce energy consumption in our

U.S. stores. In 2004, our average energy consumption

decreased 2.4 percent from 2003 to 31.56 kilowatt

hours per square foot. On a per square foot basis,

we have achieved a 27 percent reduction since 2001.

We will continue to look for additional energy

conservation opportunities in the coming year.

ENVIRONMENT, HEALTH AND SAFETY

In 2004, we worked with CH2M HILL to assess our environmental impact throughout the product life cycle. We’ve confirmed that, in the short term, we should focus our efforts on the areas over which we have direct control and, therefore, the biggest opportunity to make a difference.

OUR IMPACT ON THE ENVIRONMENT

INPUTS

OUTPUTS

PROCESSRaw Materials and Textile Production

Garment Production

Transportation of Goods

Store and Facility Construction

Store Operations (including packaging)

Consumer Use and Disposal

Water, pesticides, fertilizers, dyes, energy

Fuel, water, chemicals

Fuel, corrugate, plastic

Energy, wood, other construction materials

Energy, corrugate, plastic

Energy, water, dry cleaning chemicals

Emissions, waste, runoff (wastewater)

Emissions, wastewater, waste

Emissions, maritime waste Emissions, waste Emissions, waste Emissions, waste

INFLUENCE DIRECT CONTROL WEAK/NO CONTROL

20012002

20032004

43.29

38.2632.3

531

.56

AVERAGE STORE ENERGY CONSUMPTION

kWh/

ft2

In last year’s report, we announced that we joined

the U.S. Environmental Protection Agency's (EPA)

Climate Leaders program, which works with compa-

nies to reduce their greenhouse gas emissions on a

voluntary basis. In 2004, we worked with the EPA’s

consultant, Econergy, to develop our Climate Leaders

baseline inventory using our energy consumption

data for 2003. This is an important first step in

developing our Climate Leaders goals and measuring

our progress over time.

Waste and RecyclingA number of our environmental programs focus on

reducing waste generated by our operations. We are

always looking for ways to eliminate, reuse or recycle

potential waste.

Cardboard is a major source of waste for many

retailers, including Gap Inc. In the first half of 2004,

our Logistics division evaluated opportunities to

reduce, reuse and recycle the cardboard boxes used

to transport products to our stores. The amount of

cardboard that was reused or recycled varied greatly

among our 13 distribution facilities, with some

reusing up to 77 percent of their boxes. In 2004, we

estimate that we reused more than 10 million boxes

and recycled 38,000 tons of cardboard and paper.

Still, we know we can do better. This year, we are

encouraging all distribution centers to increase reuse

of their boxes, which could cut our cardboard supply

in half and save the company an estimated $3.5

million annually.

In the cafeterias at our San Francisco Bay Area

headquarters offices, we have introduced a compost-

ing program through which we divert approximately

19,000 pounds of waste from landfills each month.

This waste is instead turned into nutrient-rich topsoil.

Photo:Proper wastewater management requires that effluent go through various stages of treatment before it is discharged.

50 ENVIRONMENT, HEALTH AND SAFETY

Water QualityTo create the washes and rinses customers desire,

denim products go through an extensive dyeing and

treatment process that often involves chemicals. If

left untreated, wastewater discharged from denim

laundries can adversely affect the environment and

the communities in which laundries operate.

We know how important it is to protect the world’s

water supply, but our experience has shown us that

improving water quality is a complex challenge that

often requires experimentation and collaboration.

After several attempts to implement water qual-

ity programs in the past, we partnered with CH2M

HILL in 2003 to re-launch a pilot program designed

to measure denim laundries effluent against Busi-

ness for Social Responsibility’s (BSR) Water Quality

Guidelines. In 2004, we selected 20 laundries in 10

countries to participate in this program, with the

ultimate goal of including all laundries that work on

our products.

Four of the 20 participating laundries failed to meet

BSR’s strict standards. In three of these cases, we

were able to prescribe corrective measures because

the factories discharge directly into water systems.

The fourth case, however, was not so simple because

the laundry legally discharges into a Publicly Owned

Treatment Works (POTW), whose policies we cannot

influence. We are now working with the BSR Apparel

Water Quality Working Group to explore ways to

extend our reach beyond facilities directly involved in

producing our garments and to improve standards in

POTWs that do not meet our expectations.

HEALTH AND SAFETYWe are committed to protecting our employees and

customers through the enforcement of workplace

safety protocols and thorough product testing.

Workplace Health and SafetyIn 2004, we reduced our worker injury rate by 9

percent relative to 2003, with 4.43 injuries per 200,000

hours worked. While pleased with this reduction, we

continue to explore better processes and stricter

enforcement of safety protocols in all of our facilities:

51Gap Inc. 2004 Social Responsibility Report ENVIRONMENT, HEALTH AND SAFETY

Retail Stores — Our Risk Management department

partners with other corporate departments and

store employees to improve the store experience by

identifying and mitigating potential safety concerns.

Distribution Centers — To reduce the number of

workplace injuries in our distribution centers, we

maintain comprehensive safety programs and follow

rigorous fi re protection standards.

Offi ces — Since musculoskeletal injuries are

the most common type of offi ce injury, we have a

trained team of ergonomic representatives to help

employees create a comfortable and productive

work environment.

Product IntegrityMore than 30 full-time employees across the world

are directly responsible for ensuring that our

products meet strict quality and safety standards

throughout the product pipeline, from concept

through production. This team also provides training

to others who are in a position to infl uence product

safety or compliance.

Our product quality and safety standards meet or

exceed the requirements of the most stringent

product legislation in the markets where we sell

products. We require that products be tested for

safety and regulatory compliance prior to reaching

our stores. We work with independent consumer

product testing laboratories to advise us on product

standards and conduct product testing in their

facilities. Our testing protocols cover a wide range

of product characteristics, including small parts or

choking hazards, mechanical hazards such as

sharp points on trims, and fl ammability of fabrics.

Because consumer safety and confi dence in our

products is of the highest priority, we invest substan-

tial resources in establishing and refi ning standards,

procedural controls, and checks and balances to

guard against product failures.

Cruelty-Free Personal Care ProductsLike our garments, Gap Inc. personal care products

such as perfumes, lotions and sunscreens undergo

rigorous testing. We do not, however, permit testing

on animals, and require that our manufacturers

refrain from this practice as well.

WORKPLACE HEALTH AND SAFETY

1 Claims data represent domestic locations.2 Claims data for fi scal year 2004 may change as new claims may be fi led after the fi scal year end or reopened for prior year injuries.3 The Experience Modifi cation Factor is an assigned rate that compares the number and cost of a company’s Workers’ Compensation claims with

those of peer companies in their industry. A rating of “1.0” represents average performance for the industry. Gap Inc.’s rating of 0.55 is lower and, therefore, better than the industry average.

2003 20042 2003 20042 2003 20042

No. of Gap Inc. Business Partners (Employees) 111,853 117,063 42,834 45,950 154,687 163,013

Workers’ Comp. Claims1 2,650 2,431 361 303 3,011 2,734

Time Loss Claims1 756 570 115 34 871 604

Hours of Exposure 109,160,518 107,193,309 14,823,605 16,297,716 123,984,123 123,491,024

Rate of Injury per 200,000 Hours Worked 4.86 4.54 4.87 3.72 4.86 4.43

Experience Modifi cation Factor3 0.54 0.55

Retail Stores All Other Locations Total

52 STATEMENT FROM THE PUBLIC REPORTING WORKING GROUP

As Gap’s new compliance database becomes

operative, we expect future reports to provide

additional specific and aggregate data to assess

factory performance while relating the data to

systemic issues. We would like to see a future

report highlight the state of the U.S. garment

industry. We encourage Gap to broaden the scope

of its reporting to address the full range of

issues covered by the Global Reporting Initiative

(GRI). We look forward to comparable reports

from other companies.

We hope that this report will deepen

dialogue among corporations, consumers and

investors – all of us who are players in this global

system – about the impact of our decisions on the

lives of those who do not have the luxury to invest

or to change their wardrobe every season. This

is the broader dialogue that socially responsible

investing seeks to foster.

Adam Kanzer, Esq., General Counsel and Director of Shareholder Advocacy, Domini Social Invest-ments LLC Alya Z. Kayal, Esq., Manager of Research and Policy, Calvert Group Ltd. Conrad MacKerron, Director, Corporate Social Responsibility Program, As You Sow Foundation

Ruth Rosenbaum, TC, Ph.D., Executive Director, Center for Reflection, Education and Action (CREA) David M. Schilling, Director, Global Corporate Accountability Program, Interfaith Center on Corporate Responsibility

Corporations like Gap Inc. stand in a critical place in

the world. Global supply chains take companies into

nearly every corner of the developing world, placing

them in the position of buyer, mediator and labor

rights consultant. Because Gap earns substantial

revenues from its global supply chain, it bears

important responsibility for workers who

manufacture its products. It has an opportunity to

improve the lives of thousands of individuals by

its responsible actions.

We believe that Gap has made substantial progress

in focusing on the connections between its core

business, systemic global concerns and workers’

lives. We commend Gap for recognizing that brands

and retailers contribute to poor working conditions

through unreasonable expectations regarding

speed of delivery and cost, inefficient purchasing

practices, and inconsistent labor standards and

means of enforcement. Simple changes in sleeve

length or shirt color can drive unreasonable

conditions on the factory floor as workers are

pushed to meet changing demands.

The information provided in this report – specific

data points, plus frank discussion of the systemic

issues driving recurring problems – can empower

both investors and consumers to make more

responsible choices. We must also recognize that

Wall Street’s narrow focus on quarterly earnings

contributes to the problem.

This report touches on Gap’s response to the

expiration of the Multi-Fiber Arrangement (MFA) –

a significant shift in the global supply system that

can have devastating consequences in some

developing economies. We encourage Gap to share

more information about its approach, while

continuing to work with others to mitigate the

impact of this shift.

STATEMENT FROM THE PUBLIC REPORTING WORKING GROUP

53Gap Inc. 2004 Social Responsibility Report GRI INDEX/ U.N. GLOBAL COMPACT INDEX

The Global Reporting Initiative’s (GRI) Sustainability Reporting Guidelines provide a consistent framework

for reporting on general economic, environmental

and social indicators. They serve as a useful tool for

readers to compare performance over time, as well

as between companies. Similarly, the principles of

the U.N. Global Compact outline a set of criteria

against which member companies can assess

their performance.

We have included the following index in this year’s

report because we see both GRI and the Global

Compact principles as informative frameworks in our

evolving approach to CSR. While we have not been

able to report against every indicator or principle, we

hope to expand our reporting as our CSR policies and

programs become more developed.

It is important to note that GRI and the Global Com-

pact do not yet encompass some of the most material

issues in the apparel industry – in particular, man-

agement of human rights issues and labor standards

within supply chains. As a result, we have included a

significant amount of data and other information in

this report about our ethical sourcing practices that

go beyond the GRI and Global Compact guidelines.

We believe that greater standardization of reporting

is critical to promoting transparency and account-

ability within our industry. It is also an important step

towards ensuring that human rights are broadly

respected throughout supply chains. To this end, we

are participating in GRI’s working group to develop

specific reporting indicators for the apparel and foot-

wear sectors. For more information, please see page 37.

GRI Index/U.N. Global Compact Index

GRI INDICATOR U.N. GLOBAL COMPACT PRINCIPLE REPORT SECTION1 PAGE(S)Vision & Strategy1.1 Vision and strategy for sustainable development Not applicable Forging Sustainable Solutions 8-111.2 Statement from the CEO Not applicable Letter from Paul Pressler 2-3

Profile2.1 Name of reporting organization Not applicable FY2004 in Review 4-52.2 Major products, services, and brands Not applicable FY2004 in Review 4-52.3 Operational structure Not applicable Form 10-K2 2.4 Description of major divisions Not applicable FY2004 in Review 4-52.5 Location of Gap Inc. operations Not applicable Regional Breakdown of Apparel Sourcing Countries 6-7 Form 10-K2

2.6 Nature of ownership Not applicable Form 10-K2 2.7 Nature of markets served Not applicable Not reported 2.8 Scale of reporting organization Not applicable Form 10-K2 2.9 Key stakeholders Not applicable Forging Sustainable Solutions 8-11 Progress Through Partnerships 34-412.10 Contact person for report Not applicable Forging Sustainable Solutions 112.11 Reporting period Not applicable About This Report 582.12 Date of previous report Not applicable About This Report 582.13 Reporting boundaries Not applicable About This Report 582.14 Significant organizational changes Not applicable Not applicable 2.15 Basis for reporting on joint ventures Not applicable Not applicable 2.16 Explanation of re-statements of information Not applicable Not applicable provided in earlier reports 2.17 Decisions not to apply GRI principles Not applicable GRI Index/U.N. Global Compact Index 532.18 Criteria/definitions used Not applicable Forging Sustainable Solutions 8-11 The Art of Factory Monitoring 14-25 Glossary 56-572.19 Significant changes in measurement methods Not applicable Not applicable from previous years 2.20 Policies and practices to provide assurance Not applicable Gap Inc. Assessment and Recommendations (SAI) 26 Gap Inc. Program and Training Needs Assessment (Verité) 27 Progress Through Partnerships 34-41 Public Reporting Working Group Statement 52 About This Report 582.21 Independent assurance for report Not applicable Not reported 2.22 Obtaining additional information Not applicable Forging Sustainable Solutions 11

1 Due to space constraints, this report does not include all available information corresponding to certain GRI indicators. Where relevant, this index provides links to the company web site where more information can be found.

2 Form 10-K refers to the company’s 2004 Form 10-K, filed on March 28, 2005 with the Securities and Exchange Commission.

54 GRI INDEX/ U.N. GLOBAL COMPACT INDEX

GRI INDICATOR U.N. GLOBAL COMPACT PRINCIPLE REPORT SECTION1 PAGE(S)Governance Structure & Management Systems3.1 Gap Inc. governance structure Not applicable Form 10-K2 3.2 Percentage of independent, non-executive directors Not applicable Form 10-K2 3.3 Process for determining Board member expertise Not applicable Not reported 3.4 Board-level identification and management of risk Not applicable Not reported 3.5 Executive compensation and company goals Not applicable 2005 Proxy Statement 3.6 Organizational structure for economic, Not applicable Not reported environmental, and social policies 3.7 Mission and values statements, internally Not applicable The Art of Factory Monitoring 22-23 developed codes of conduct Employees 45 Gap Inc. Code of Business Conduct 3.8 Mechanisms for shareholders to provide Not applicable Not reported recommendations3.9 Identification and selection of major stakeholders Not applicable Progress Through Partnerships 34-413.10 Stakeholder consultation Not applicable Gap Inc. Assessment and Recommendations (SAI) 26 Gap Inc. Program and Training Needs Assessment (Verité) 27 Progress Through Partnerships 34-41 Statement from the Public Reporting Working Group 523.11/12 Information generated from stakeholder Not applicable 2004-06 Goals 12-13 consultations and its use Gap Inc. Assessment and Recommendations (SAI) 26 Gap Inc. Program and Training Needs Assessment (Verité) 27 Progress Through Partnerships 34-41 Statement from the Public Reporting Working Group 523.13 Precautionary principle Principle 7: Businesses should support a Not reported precautionary approach to environmental challenges 3.14 Voluntary principles and other initiatives to which Not applicable Progress Through Partnerships 34-41 Gap Inc. subscribes or endorses3.15 Principle memberships Not applicable Progress Through Partnerships 34-413.16/17 Managing upstream and downstream impacts Not applicable Integrating Labor Standards into Our Business Practices 28-333.18 Major decisions on operational changes Not applicable Integrating Labor Standards into Our Business Practices 28-333.19 Programs and procedures pertaining to economic, Not applicable Global Map of Initiatives 6-7 environmental, and social performance Forging Sustainable Solutions 8-11 The Art of Factory Monitoring 14-25 Integrating Labor Standards into Our Business Practices 28-33 Progress Through Partnerships 34-41 Employees 42-45 Community Involvement 46-47 Environment, Health and Safety 48-513.20 Certification of management systems Not applicable Integrating Labor Standards into Our Business Practices 30

Economic Performance IndicatorsEC1 Net sales Not applicable FY2004 in Review 4EC2 Geographic breakdown of markets Not applicable Form 10-K2 EC3 Cost of materials purchased Not applicable Not reported EC4 Contracts paid by agreed terms Not applicable Not reported EC5 Total payroll and benefits Not applicable Not reported EC6 Distribution to capital providers Not applicable Form 10-K2 EC7 Increase/decrease in retained earnings Not applicable Form 10-K2 EC8 Total sum of taxes paid Not applicable Form 10-K2 EC9 Subsidies received Not applicable Not reported EC10 Community donations Not applicable FY2004 in Review 5EC11 Supplier breakdown Not applicable Regional Breakdown of Apparel Sourcing Countries 6-7

Environmental Performance Indicators3

EN1 Total materials use Principle 8: Businesses should undertake initiatives Not reported to promote greater environmental responsibility EN2 Percentage of waste materials used Principle 8: Businesses should undertake initiatives Not reported to promote greater environmental responsibility EN3 Direct energy use Principle 8: Businesses should undertake initiatives Environment, Health and Safety 49

to promote greater environmental responsibility EN4 Indirect energy use Principle 8: Businesses should undertake initiatives Not reported to promote greater environmental responsibility EN5 Total water use Principle 8: Businesses should undertake initiatives Not reported to promote greater environmental responsibility EN6 Biodiversity-rich habitats Principle 8: Businesses should undertake initiatives Not reported to promote greater environmental responsibility EN7 Biodiversity impacts Principle 8: Businesses should undertake initiatives Not reported to promote greater environmental responsibility EN8 Greenhouse gas emissions Principle 8: Businesses should undertake initiatives Not reported to promote greater environmental responsibility EN9 Use and emissions of ozone-depleting substances Principle 8: Businesses should undertake initiatives Not reported to promote greater environmental responsibility EN10 NOx, SOx, and other air emissions Principle 8: Businesses should undertake initiatives Not reported to promote greater environmental responsibility

3 We recognize that our reporting against GRI environmental indicators is particularly limited this year. Still, we have included this section in the index because we see the GRI indicators as a helpful framework to help evolve our environmental program, and we hope to be able to report more information in future reports.

55Gap Inc. 2004 Social Responsibility Report GRI INDEX/ U.N. GLOBAL COMPACT INDEX

GRI INDICATOR U.N. GLOBAL COMPACT PRINCIPLE REPORT SECTION1 PAGE(S)Environmental Performance Indicators, continuedEN12 Significant discharges to water Principle 8: Businesses should undertake initiatives Environment, Health and Safety 50 to promote greater environmental responsibility EN13 Significant spills Principle 8: Businesses should undertake initiatives Not reported to promote greater environmental responsibility EN14 Environmental impact of products and services Principle 8: Businesses should undertake initiatives Environment, Health and Safety 49 to promote greater environmental responsibility EN15 Reclaimable product after useful life Principle 8: Businesses should undertake initiatives Not reported to promote greater environmental responsibility EN16 Incidents and fines for environmental Principle 8: Businesses should undertake initiatives Not reported non-compliance to promote greater environmental responsibility EN17 Initiatives to use renewable energy sources Principle 9: Businesses should encourage the Environment, Health and Safety 48-51 and to increase energy efficiency development and diffusion of environmentally friendly technologies

Social Performance IndicatorsLA1 Breakdown of workforce Not applicable Not reported LA2 New employment creation and average turnover Not applicable Not reported LA3 Employees represented by independent Not applicable Not reported trade union organizationsLA4 Policy and procedures relating to Not applicable Not reported employee consultation LA5 Occupational accidents and diseases Not applicable Environment, Health and Safety 51LA6 Formal joint health and safety committees Not applicable Not reported LA7 Injury, lost day, and absentee rates Not applicable Environment, Health and Safety 51LA8 Polices or programs on HIV/AIDS Not applicable Global Map of Initiatives 7LA9 Average hours of training per employee Not applicable Not reported LA10 Equal opportunities policies, programs, and systems Principle 6: Businesses should support the Gap Inc. Code of Business Conduct elimination of discrimination in respect of employment and occupationLA11 Composition of senior management Principle 6: Businesses should support the Form 10-K2 elimination of discrimination in respect of employment and occupationLA12 Employee benefits beyond those legally mandated Not applicable Employees 44-45HR1 Policies and procedures on human rights Principle 1: Businesses should support and The Art of Factory Monitoring 14-27 respect the protection of internationally proclaimed Integrating Labor Standards into Our Business Practices 28-33 human rights Progress Through Partnerships 34-41 Principle 2: Businesses should make sure that they are not complicit in human rights abuses HR2 Evidence of human rights consideration in Principle 1: Businesses should support and The Art of Factory Monitoring 14-27 business decisions respect the protection of internationally proclaimed Integrating Labor Standards into Our Business Practices 28-33 human rights Progress Through Partnerships 34-41 Principle 2: Businesses should make sure that they are not complicit in human rights abuses HR3 Policies and procedures to address human rights Principle 2: Businesses should make sure that they Forging Sustainable Solutions 8-11 performance within supply chain are not complicit in human rights abuses The Art of Factory Monitoring 14-27 Integrating Labor Standards into Our Business Practices 28-33 Progess Through Partnerships 34-41HR4 Policy, procedures, and monitoring to prevent Principle 6: Businesses should support the The Art of Factory Monitoring 14-27 discrimination elimination of discrimination in respect of Employees 42-43 employment and occupation Gap Inc. Code of Business ConductHR5 Policy, procedures, and monitoring Principle 3: Businesses should uphold freedom The Art of Factory Monitoring 14-27 on freedom of association of association and the effective recognition of the Employees 42 right to collective bargaining HR6 Policy, procedures, and monitoring on child labor Principle 5: Businesses should support the effective The Art of Factory Monitoring 18, 21-23 abolition of child labor HR7 Policy, procedures, and monitoring on forced labor Principle 4: Businesses should support the The Art of Factory Monitoring 18, 21-23 elimination of all forms of forced and compulsory labor SO1 Policy, procedures, and monitoring on Not applicable Not reported community impactSO2 Policy, procedures, and monitoring on bribery Principle 10: Businesses should work against all Gap Inc. Code of Business Conduct and corruption forms of corruption, including extortion and bribery SO3 Policy, procedures, and monitoring on political Not applicable Gap Inc. Code of Business Conduct lobbying and contributions SO4 Awards received for social, ethical and Not applicable Not reported 43 environmental performanceSO7 Policy, procedures, and monitoring to prevent Not applicable Gap Inc. Code of Business Conduct anti-competitive behaviorPR1 Customer health and safety in product use Not applicable Environment, Health and Safety 51

PR2 Policy, procedures, and monitoring on product Not applicable Not reported information and labelingPR3 Policy, procedures, and monitoring on Not applicable Not reported consumer privacy

56 GLOSSARY

Glossary

Business Coalition for Capacity Building (BCCB)

A private, cross-industry coalition of companies that

works with governments, international organizations

and civil society to advocate for effective capacity-

building in the developing world.

Business Leaders Initiative on Human Rights (BLIHR)

A program that assists the private sector to further

integrate human rights standards into business

practices and policies. For more information, visit

www.blihr.org.

Business for Social Responsibility (BSR)

A global organization that helps member companies

achieve success in ways that respect ethical values,

people, communities and the environment. For more

information, visit www.bsr.org.

CH2M HILL

A multinational firm providing engineering, construc-

tion, operations, communications, security, environ-

mental, and related services to public and private

clients in numerous industries. For more information,

visit www.ch2m.com.

Climate Leaders

A voluntary U.S. Environmental Protection Agency in-

dustry-government partnership that works with com-

panies to develop a comprehensive climate change

strategy. Partners complete an annual greenhouse

gas inventory and set a long-term goal to reduce

emissions.

Code of Business Conduct

Gap Inc.’s internal ethics code which governs business

practices and is designed to help the company and its

employees avoid conflicts of interest, achieve compli-

ance with laws, and protect company assets, including

employees and properties.

Code of Vendor Conduct (COVC)

Basic requirements set forth by Gap Inc. that all

manufacturers and factories must be able to meet in

order to do business with the company. The Code pro-

vides the foundation for Gap’s ongoing evaluation of a

manufacturer’s employment practices and environ-

mental compliance.

Ethical Trading Initiative (ETI)

An alliance of companies, NGOs, and trade union

organizations committed to working together to

identify and promote ethical trade. For more

information, visit www.ethicaltrade.org.

Freedom of association

As defined in the Gap Inc. Code of Vendor Conduct,

the right of workers to lawfully join associations of

their own choosing, peacefully associate, organize or

bargain collectively.

Global Compliance

The Gap Inc. department responsible for enforcing

the company’s Code of Vendor Conduct in the

manufacturing facilities that produce its apparel and

for stakeholder engagement in the area of labor

standards and working conditions.

Global Reporting Initiative (GRI)

A multi-stakeholder process and independent institu-

tion whose mission is to develop and disseminate

globally applicable sustainability reporting guidelines.

For more information, visit www.globalreporting.org.

Homeworkers

Garment workers who work in their homes or villages

due to social, cultural and economic reasons.

Hong Kong Productivity Council (HKPC)

A multidisciplinary organization established by

statute in 1967 to promote increased productivity and

the use of more efficient methods throughout Hong

Kong’s business sectors. For more information,

visit www.hkpc.org.

Impactt

A U.K.-based consultancy group that works with

companies, organizations and individuals to develop

business practices which extend the number of people

who benefit from international trade and investment.

For more information, visit

www.impacttlimited.com.

57Gap Inc. 2004 Social Responsibility Report GLOSSARY

Independent monitoring

Ongoing monitoring of working conditions conducted

by local nonprofit, civil society organizations at the

request of companies or international organizations.

Independent monitoring groups usually report their

findings publicly.

International Labour Organization (ILO)

The U.N. specialized agency that seeks the promotion

of social justice and internationally recognized labor

rights. For more information, visit www.ilo.org.

Joint Initiative on Corporate Accountability

and Workers' Rights

A collaboration between six multi-stakeholder

organizations to work with garment manufacturers

with the aim of developing a common code of factory

labor standards and consistent methods of

implementation and monitoring. For more

information, visit www.jo-in.org.

Multi-Fiber Arrangement (MFA)

An internationally negotiated system of quotas on

textile and apparel outside the rules set out in the

General Agreement on Tariffs and Trade (GATT) which

allowed importing signatory countries to apply quan-

titative restrictions on textile imports when they con-

sidered them necessary to prevent market disruption,

even when such restrictions were otherwise contrary

to GATT rules. Under the Uruguay Round agreement,

MFA quotas were phased out at the end of 2004.

Non-governmental organizations (NGOs)

National, international and community-based groups

that raise awareness about social, environmental,

community and human rights issues.

Public Reporting Working Group

A group of stakeholders with whom Gap Inc. has

worked since late 2002 to explore opportunities for

greater transparency and increased sustainability of

our work. This working group is comprised of Domini

Social Investments (www.domini.com), the Calvert

Group (www.calvertgroup.com), the As You Sow

Foundation (www.asyousow.org), the Center for

Reflection, Education and Action (www.crea-inc.org),

and the Interfaith Center on Corporate Responsibility

(www.iccr.org).

Quota

A restriction on an export category such as those

established by the Multi-Fiber Arrangement for

textiles and garments. This particular quota system

was lifted on January 1, 2005.

Social Accountability International (SAI)

A nonprofit organization dedicated to the development,

implementation and oversight of voluntary, verifiable

social accountability standards. SAI developed the

SA8000 standard, which covers all widely accepted

international labor rights and requires a factory-level

management system to ensure ongoing improvement.

For more information, visit www.sa-intl.org.

Sourcing

The process by which Gap Inc. selects and places or-

ders with manufacturers around the world to produce

the merchandise sold in its stores.

Stakeholders

Individuals and groups including NGOs, unions,

governments, suppliers, shareholders and employees

who have a vested interest in the way companies

conduct their business.

Uniform code of conduct

A standard code of vendor conduct used across

an industry. This is a goal of many multi-stakeholder

groups.

Vendor Compliance Officer (VCO)

A member of Gap Inc.’s Global Compliance department

who monitors working conditions of manufacturers

producing goods for the company.

Verité

An independent, nonprofit social auditing and research

organization whose goal is to ensure that people

worldwide work under safe, fair and legal working

conditions. For more information, visit

www.verite.org.

Production of the ReportFor the production of this report, we selected an environmentally responsible printer that has a “zero landfill” policy, recycles all process material waste and has an enclosed printing facility with negligible fugitive emissions. This report was printed in the U.S.A. on 100% recycled fiber.Design: O&J Design, Inc.Photography: Pages 1, 14, 28, 50 photos © 2004 Luis Ascui; Pages 16, 40 photos © 2004 Sacha Dean Biyan; Page 47 photo © 2004 Rob Brodman; Page 8 photo © 2004 Bret Bussey; Pages 25, 27, 31, 34, 36 photos © 2004 Katarina Hesse; Page 2 photo © 2004 Ted Kawalerski; Cover, Pages 38, 48 photos © 2004 Tom Pietrasik; Page 20 photo © 2004 Brent Stirton; Page 17 photo © 2005 P7 Professional Photography; Page 46 photo © 2005 Chris Takagi.Printing: Lithographix, Inc.© Gap Inc. 2005

ABOUT THIS REPORT Scope —This report discusses Gap Inc.’s domestic and international operations and addresses our efforts

in the areas of supply chain labor standards, employees, community involvement and the environment, health

and safety. For information on corporate governance, please visit www.gapinc.com.

Reporting Year — Data included in this report reflect activities during Gap Inc.’s fiscal year 2004

(February 1, 2004, through January 31, 2005), unless otherwise noted.

Previous Report — Gap Inc.’s 2003 Social Responsibility Report is available online at www.gapinc.com.

Reporting AssuranceWhile we continue to explore more formal procedures, we believe that candid feedback from a broad range

of stakeholders is currently the best way to ensure the accuracy and relevance of the information we report.

The assurance process used in the development of this report included the following:

• Stakeholder Outreach Sessions — In Fall 2004, we convened two outreach sessions—one in Washington, D.C.

and the other in London—to solicit feedback on our programs and our approach to reporting.

• External Program Verification — We invited SAI and Verité to examine our Global Compliance program and

have included summaries of their assessments in this report (pp. 26-27).

• Public Reporting Working Group — Members of our Public Reporting Working Group (p. 52) have been

working with us since late 2002 to develop our reporting procedures and drive greater levels of transparency

in our communications.

Global Reporting InitiativeAlthough we are not in full accordance with the GRI Sustainability Reporting Guidlines, we view its principles and

indicators as tools that will help us evolve our programs. Please see the appendix for a full list of GRI

indicators and the sections of this publication in which they apply.

This report is printed on New Leaf Reincarnation Matte, made with 100% recycled fiber, 50% post-consumer waste, processed chlorine-free. By using this environmentally friendly paper, Gap Inc. saved the following resources:

85 fully grown trees 18,449 gallons of water 38 million BTUs of energy 4,036 pounds of solid waste 6,820 pounds of greenhouse gases

58 ABOUT THIS REPORT

On the cover: Women embroidering Old Navy shirts at the Project Swabhiman

social welfare home, Delhi, India, February 2005.

Founded in 2003 with support from Gap Inc., Project Swabhiman is a joint effort with

the Delhi government’s Social Welfare Department and two local Non Governmen-

tal Organizations, Nav Jyoti and Partners in Change, to help women who have been

victims of domestic violence.

The program offers participants shelter, support services and job training, and pro-

vides them with a clean and safe work environment in which the intricate garment

handwork the region is known for can be produced under ethical conditions.

The name “Swabhiman” was chosen by the women participating in the project. It is

Hindi for “self respect, self pride and dignity.”

“ Project Swabhiman has helped me through personal

difficulty. I learned a new skill—handwork which will

be beneficial for me in the future—and I am earning

money and have a bank account which helps me in

saving money.” Anita, 20 years old

Two Folsom StreetSan Francisco, CA 94105www.gapinc.com

facing challengesfi nding opportunities2 0 0 4 S O C I A L R E S P O N S I B I L I T Y R E P O R T

GA

P IN

C. 2

00

4 S

OC

IAL

RE

SP

ON

SIB

ILIT

Y R

EP

OR

T